NOTE 1. BASIS OF PRESENTATION
The interim unaudited Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended
September 30, 2016
included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 14, 2016. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.
The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the three and
nine
month periods ended
June 30, 2017
are not necessarily indicative of the results expected for the fiscal year ending
September 30, 2017
.
The Company reclassified insignificant electronic return originator ("ERO") and taxpayer advance fee income and related expenses during the first quarter of fiscal year 2017 from loan fees and other income to tax product fees and other expenses to tax product expense. Prior period amounts have also been reclassified.
As of March 31, 2017, certain insignificant adjustments to previously reported Earnings Per Share ("EPS") were made to correctly reflect the effect of participating securities on basic and diluted EPS calculations in accordance with ASC 260. These changes were immaterial to the overall EPS calculation.
The Company has early adopted Accounting Standards Update ("ASU") 2016-09,
"Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting."
The requirement to report the excess tax benefit related to settlements of share-based payment awards in earnings as an increase or (decrease) to income tax expense has been applied utilizing the prospective method and resulted in a tax benefit of
$0.5 million
for the quarter ended June 30, 2017. In addition, the Company recognized
$0.3 million
in compensation expense for the quarter ended June 30, 2017 related to the reversal of forfeitures in accordance with the adoption. While the adoption of ASU 2016-09 requires retrospective application to all fiscal year periods presented, the Company elected to not recast previously reported financial statements as the impact was considered insignificant. However, the Company reclassified stock compensation from financing to operating activities on the Consolidated Statement of Cash Flows as of June 30, 2017 and June 30, 2016.
NOTE 2. ACQUISITIONS
EPS Financial
On November 1, 2016, the Company, through its wholly-owned subsidiary, MetaBank, completed the acquisition of substantially all of the assets and certain liabilities of EPS Financial, LLC ("EPS") from privately-held Drake Enterprises, Ltd. ("Drake"). The assets acquired by MetaBank in the EPS acquisition include the EPS trade name, operating platform, and other assets. EPS is a leading provider of comprehensive tax-related financial transaction solutions for over
10,000
ERO's nationwide, offering a one-stop-shop for all tax preparer financial transactions. These solutions include a full-suite of refund settlement products, prepaid payroll card solutions and merchant services.
Under the terms of the purchase agreement, the aggregate purchase price, which was based upon the November 1, 2016 tangible book value of EPS, included the payment of
$21.9 million
in cash, after adjustments, and the issuance of
369,179
shares of Meta Financial common stock. The Company acquired assets with approximate fair values of
$17.9 million
of intangible assets, including customer relationships, trademark, and non-compete agreements, and
$0.1 million
of other assets, resulting in
$30.4 million
of goodwill.
The following table represents the approximate fair value of assets acquired and liabilities assumed of EPS on the consolidated statement of financial condition as of November 1, 2016.
|
|
|
|
|
|
As of November 1, 2016
|
|
(Dollars in Thousands)
|
Fair value of consideration paid
|
|
Cash
|
$
|
21,877
|
|
Stock issued
|
26,507
|
|
Total consideration paid
|
48,384
|
|
|
|
Fair value of assets acquired
|
|
Intangible assets
|
17,930
|
|
Other assets
|
79
|
|
Total assets
|
18,009
|
|
Fair value of net assets acquired
|
18,009
|
|
Goodwill resulting from acquisition
|
$
|
30,375
|
|
The Company has included the financial results of EPS in its consolidated financial statements subsequent to the acquisition date. The EPS transaction has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the transaction date. The Company made significant estimates and exercised judgment in estimating fair values and accounting for such acquired assets and liabilities.
The Company recognized goodwill of
$30.4 million
as of November 1, 2016, which was calculated as the excess of both the consideration exchanged and the liabilities assumed, which were negligible, as compared to the fair value of identifiable assets acquired. Goodwill resulted from expected operational synergies and expanded product lines and is expected to be deductible for tax purposes. See Note 12 to the Condensed Consolidated Financial Statements for further information on goodwill.
The Company recognized
$0.5 million
of pre-tax transaction-related expenses during the first nine months of fiscal year 2017. The transaction expenses are reflected on the consolidated statement of operations primarily under legal and consulting.
SCS
On December 14, 2016, the Company, through MetaBank, completed the acquisition of substantially all of the assets and specified liabilities of Specialty Consumer Services LP ("SCS"). The assets acquired by MetaBank in the SCS acquisition include the SCS trade name, propriety underwriting model and loan management system and other assets. SCS primarily provides consumer tax advance and other consumer credit services through its loan management services and other financial products.
Under the terms of the purchase agreement, the aggregate purchase price paid at closing, which was based upon the December 14, 2016 tangible book value of SCS, was approximately
$7.5 million
in cash and the issuance of
113,328
shares of Meta Financial common stock. In addition, contingent cash consideration of up to
$17.3 million
(estimated fair value), payable in cash, and equity contingent consideration of up to
264,431
shares of Meta Financial common stock, will be paid if certain performance benchmarks are achieved subsequent to closing (described more fully below). The Company acquired assets with approximate fair values of
$28.3 million
of intangible assets, including customer relationships, trademark, and non-compete agreements, and negligible other assets, resulting in goodwill of
$31.4 million
. All amounts are at estimated fair market values.
Subject to the equity earn-out terms of the purchase agreement, SCS will be eligible to receive up to an aggregate of
264,431
shares of Meta Financial common stock within
20
days after the applicable equity earn-out statement is deemed final if certain targets are achieved. The equity earn-out measurements are as follows; 1) if, as of an equity earn-out measurement date, the anticipated 2018 measured gross profit meets or exceeds the statement amount, MetaBank will deliver to SCS a stated number of shares of Meta common stock; 2) if, as of an equity earn-out measurement date, the aggregate anticipated loan volume under all 2018 eligible contracts is greater than or equal to the agreed upon volume amount, then MetaBank will deliver to SCS a stated number of shares of Meta common stock; and 3) if, as of an equity earn-out measurement date, each agreement specified in the contract is in effect and each such agreement is not amended or modified as of such time (except as approved in writing by the President of MetaBank, in his or her sole discretion), then MetaBank will deliver to SCS a stated number of shares of Meta common stock. None of the equity earn-out payments are contingent on the achievement of any of the other equity earn-out targets.
Subject to the cash earn-out terms of the purchase agreement, MetaBank agreed to pay to SCS an amount equal to
100%
of the 2017 measured business gross profit up to a maximum of
$17.5 million
within
20
days after the date on which each determination of the cash earn-out payment is deemed final. During the third quarter of fiscal 2017, MetaBank paid out the
$17.5 million
of contingent cash consideration to SCS based upon the measured business gross profit.
The Company has included the financial results of SCS in its consolidated financial statements subsequent to the acquisition date. The fair value of the liability for the cash contingent consideration was approximately
$17.3 million
and was included in other liabilities in the Company's consolidated statement of financial condition. The fair value of the equity contingent consideration was approximately
$24.1 million
at closing and was included in additional paid-in capital in the Company's consolidated statement of financial condition. The respective fair values of the liability and equity were estimated using an option-based income valuation method with significant inputs that were not observable in the market and thus represent a Level 3 fair value measurement as defined in the FASB's Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our probability assessments of the expected future cash flows related to our acquisition of SCS during the earn-out period.
The following table represents the approximate fair value of assets acquired from and liabilities recorded of SCS on the consolidated statement of financial condition as of December 14, 2016.
|
|
|
|
|
As of December 14, 2016
|
|
(Dollars in Thousands)
|
Fair value of transaction consideration
|
|
Cash
|
7,548
|
|
Stock issued
|
10,789
|
|
Paid consideration
|
18,337
|
|
Contingent consideration - cash
|
17,252
|
|
Contingent consideration - equity
|
24,142
|
|
Contingent consideration payable
|
41,394
|
|
Total consideration paid
|
59,731
|
|
|
|
Fair value of assets acquired
|
|
Intangible assets
|
28,310
|
|
Other assets
|
2
|
|
Total assets
|
28,312
|
|
Fair value of net assets acquired
|
28,312
|
|
Goodwill resulting from acquisition
|
31,419
|
|
The SCS transaction has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the transaction date. The Company made significant estimates and exercised judgment in estimating fair values and accounting for such acquired assets and liabilities. Upon receipt of final fair value estimates on certain assets, liabilities, and contingent considerations, which must be within one year of the acquisition date, the Company made final adjustments to the purchase price allocation and retrospectively adjusted the recorded goodwill. The Company recorded a contingent liability in the amount of
$17.3 million
to reflect the fair market value of the potential cash earn-out payment.
The Company recognized goodwill of
$31.4 million
as of December 14, 2016, which was calculated as the excess of both the adjusted consideration exchanged and the liabilities recorded as compared to the fair value of identifiable assets acquired. Goodwill resulted from expected operational synergies and expanded product lines and is expected to be deductible for tax purposes. See Note 12 to the Condensed Consolidated Financial Statements for further information on goodwill.
The Company recognized
$0.8 million
of pre-tax transaction related expenses during the first nine months of fiscal year 2017. The transaction expenses are reflected on the consolidated statement of operations primarily under legal and consulting.
NOTE 3. CREDIT DISCLOSURES
The allowance for loan losses represents management’s estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.
Loans are considered impaired if full principal or interest payments are not probable in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers loans not considered impaired and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Homogeneous loan populations are collectively evaluated for impairment. These loan populations may include premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, home equity and second mortgage loans, and tax product loans. Commercial and agricultural loans as well as mortgage loans secured by other properties are monitored regularly by the Bank given the larger balances. When analysis of the borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business is not adequate to meet its debt service requirements, the individual loan or loan relationship is evaluated for impairment. Often this is associated with a delay or shortfall in payments of
210
days or more for premium finance, 180 days or more for refund advance loans, 120 days or more for ERO advance loans loans and
90
days or more for other loan categories. Non-accrual loans and all troubled debt restructurings are considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans receivable at
June 30, 2017
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
|
(Dollars in Thousands)
|
1-4 Family Real Estate
|
$
|
190,731
|
|
|
$
|
162,298
|
|
Commercial and Multi-Family Real Estate
|
493,859
|
|
|
422,932
|
|
Agricultural Real Estate
|
62,521
|
|
|
63,612
|
|
Consumer
|
172,151
|
|
|
37,094
|
|
Commercial Operating
|
39,076
|
|
|
31,271
|
|
Agricultural Operating
|
35,471
|
|
|
37,083
|
|
Premium Finance
|
231,587
|
|
|
171,604
|
|
Total Loans Receivable
|
1,225,396
|
|
|
925,894
|
|
|
|
|
|
Allowance for Loan Losses
|
(14,968
|
)
|
|
(5,635
|
)
|
Net Deferred Loan Origination Fees
|
(1,037
|
)
|
|
(789
|
)
|
Total Loans Receivable, Net
|
$
|
1,209,391
|
|
|
$
|
919,470
|
|
Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and nine months ended
June 30, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
Real Estate
|
|
Commercial and
Multi-Family
Real Estate
|
|
Agricultural
Real Estate
|
|
Consumer
|
|
Commercial
Operating
|
|
Agricultural
Operating
|
|
Premium
Finance
|
|
Unallocated
|
|
Total
|
|
(Dollars in Thousands)
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
296
|
|
|
$
|
1,742
|
|
|
$
|
1,524
|
|
|
$
|
7,706
|
|
|
$
|
767
|
|
|
$
|
1,349
|
|
|
$
|
597
|
|
|
$
|
621
|
|
|
$
|
14,602
|
|
Provision (recovery) for loan losses
|
510
|
|
|
386
|
|
|
(80
|
)
|
|
142
|
|
|
249
|
|
|
(44
|
)
|
|
187
|
|
|
(110
|
)
|
|
1,240
|
|
Charge offs
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(799
|
)
|
|
—
|
|
|
(94
|
)
|
|
—
|
|
|
(894
|
)
|
Recoveries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
20
|
|
Ending balance
|
$
|
806
|
|
|
$
|
2,128
|
|
|
$
|
1,444
|
|
|
$
|
7,847
|
|
|
$
|
222
|
|
|
$
|
1,305
|
|
|
$
|
705
|
|
|
$
|
511
|
|
|
$
|
14,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
654
|
|
|
$
|
2,198
|
|
|
$
|
142
|
|
|
$
|
51
|
|
|
$
|
117
|
|
|
$
|
1,332
|
|
|
$
|
588
|
|
|
$
|
553
|
|
|
$
|
5,635
|
|
Provision (recovery) for loan
losses
|
152
|
|
|
(70
|
)
|
|
1,302
|
|
|
7,773
|
|
|
1,244
|
|
|
(39
|
)
|
|
412
|
|
|
(42
|
)
|
|
10,732
|
|
Charge offs
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1,149
|
)
|
|
—
|
|
|
(352
|
)
|
|
—
|
|
|
(1,502
|
)
|
Recoveries
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
10
|
|
|
12
|
|
|
57
|
|
|
—
|
|
|
103
|
|
Ending balance
|
$
|
806
|
|
|
$
|
2,128
|
|
|
$
|
1,444
|
|
|
$
|
7,847
|
|
|
$
|
222
|
|
|
$
|
1,305
|
|
|
$
|
705
|
|
|
$
|
511
|
|
|
$
|
14,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance: collectively evaluated for impairment
|
806
|
|
|
2,128
|
|
|
1,444
|
|
|
7,847
|
|
|
222
|
|
|
1,305
|
|
|
705
|
|
|
511
|
|
|
14,968
|
|
Total
|
$
|
806
|
|
|
$
|
2,128
|
|
|
$
|
1,444
|
|
|
$
|
7,847
|
|
|
$
|
222
|
|
|
$
|
1,305
|
|
|
$
|
705
|
|
|
$
|
511
|
|
|
$
|
14,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment
|
133
|
|
|
1,301
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,434
|
|
Ending balance: collectively
evaluated for impairment
|
190,598
|
|
|
492,558
|
|
|
62,521
|
|
|
172,151
|
|
|
39,076
|
|
|
35,471
|
|
|
231,587
|
|
|
—
|
|
|
1,223,962
|
|
Total
|
$
|
190,731
|
|
|
$
|
493,859
|
|
|
$
|
62,521
|
|
|
$
|
172,151
|
|
|
$
|
39,076
|
|
|
$
|
35,471
|
|
|
$
|
231,587
|
|
|
$
|
—
|
|
|
$
|
1,225,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
Real Estate
|
|
Commercial and
Multi-Family
Real Estate
|
|
Agricultural
Real Estate
|
|
Consumer
|
|
Commercial
Operating
|
|
Agricultural
Operating
|
|
Premium
Finance
|
|
Unallocated
|
|
Total
|
|
(Dollars in Thousands)
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
327
|
|
|
$
|
1,694
|
|
|
$
|
154
|
|
|
$
|
1,059
|
|
|
$
|
45
|
|
|
$
|
3,327
|
|
|
$
|
477
|
|
|
$
|
348
|
|
|
$
|
7,431
|
|
Provision (recovery) for loan losses
|
66
|
|
|
428
|
|
|
49
|
|
|
(243
|
)
|
|
281
|
|
|
1,436
|
|
|
95
|
|
|
(14
|
)
|
|
2,098
|
|
Charge offs
|
—
|
|
|
(95
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(3,253
|
)
|
|
(104
|
)
|
|
—
|
|
|
(3,453
|
)
|
Recoveries
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
44
|
|
Ending balance
|
$
|
393
|
|
|
$
|
2,027
|
|
|
$
|
203
|
|
|
$
|
816
|
|
|
$
|
326
|
|
|
$
|
1,510
|
|
|
$
|
511
|
|
|
$
|
334
|
|
|
$
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
278
|
|
|
$
|
1,187
|
|
|
$
|
163
|
|
|
$
|
20
|
|
|
$
|
28
|
|
|
$
|
3,537
|
|
|
$
|
293
|
|
|
$
|
749
|
|
|
$
|
6,255
|
|
Provision (recovery) for loan
losses
|
115
|
|
|
1,225
|
|
|
40
|
|
|
796
|
|
|
298
|
|
|
1,226
|
|
|
772
|
|
|
(415
|
)
|
|
4,057
|
|
Charge offs
|
—
|
|
|
(385
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(3,253
|
)
|
|
(631
|
)
|
|
—
|
|
|
(4,270
|
)
|
Recoveries
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
—
|
|
|
78
|
|
Ending balance
|
$
|
393
|
|
|
$
|
2,027
|
|
|
$
|
203
|
|
|
$
|
816
|
|
|
$
|
326
|
|
|
$
|
1,510
|
|
|
$
|
511
|
|
|
$
|
334
|
|
|
$
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Ending balance: collectively
evaluated for impairment
|
362
|
|
|
2,027
|
|
|
203
|
|
|
816
|
|
|
326
|
|
|
1,510
|
|
|
511
|
|
|
334
|
|
|
6,089
|
|
Total
|
$
|
393
|
|
|
$
|
2,027
|
|
|
$
|
203
|
|
|
$
|
816
|
|
|
$
|
326
|
|
|
$
|
1,510
|
|
|
$
|
511
|
|
|
$
|
334
|
|
|
$
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment
|
210
|
|
|
994
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,207
|
|
Ending balance: collectively
evaluated for impairment
|
150,251
|
|
|
385,804
|
|
|
64,130
|
|
|
36,986
|
|
|
40,968
|
|
|
40,435
|
|
|
141,342
|
|
|
—
|
|
|
859,916
|
|
Total
|
$
|
150,461
|
|
|
$
|
386,798
|
|
|
$
|
64,130
|
|
|
$
|
36,986
|
|
|
$
|
40,971
|
|
|
$
|
40,435
|
|
|
$
|
141,342
|
|
|
$
|
—
|
|
|
$
|
861,123
|
|
Federal regulations promulgated by the Company's primary federal regulator, the Office of the Comptroller of the Currency (the "OCC"), provide for the classification of loans and other assets such as debt and equity securities. The loan classification and risk rating definitions for the Company and its wholly-owned subsidiary, MetaBank (the "Bank"), are generally as follows:
Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.
Watch- A watch asset is generally credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures. Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention. These assets are of better quality than special mention assets.
Special Mention- Special mention assets are credits with potential weaknesses deserving management’s close attention and if left uncorrected, may result in deterioration of the repayment prospects for the asset. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.
Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position. Assets so classified have well-defined weaknesses creating a distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected. Loss potential does not have to exist for an asset to be classified as substandard.
Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort. Due to pending factors the asset’s classification as loss is not yet appropriate.
Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Company's balance sheet is no longer warranted. This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.
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 Company 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 Company'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.
The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, or a geographic location. Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Company’s Tier 1 Capital plus the Allowance for Loan Losses.
The asset classification of loans at
June 30, 2017
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
1-4 Family
Real Estate
|
|
Commercial and
Multi-Family
Real Estate
|
|
Agricultural
Real Estate
|
|
Consumer
|
|
Commercial
Operating
|
|
Agricultural
Operating
|
|
Premium
Finance
|
|
Total
|
|
(Dollars in Thousands)
|
Pass
|
$
|
189,645
|
|
|
$
|
488,279
|
|
|
$
|
27,580
|
|
|
$
|
172,151
|
|
|
$
|
39,076
|
|
|
$
|
20,018
|
|
|
$
|
231,587
|
|
|
$
|
1,168,336
|
|
Watch
|
532
|
|
|
3,871
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
4,444
|
|
Special Mention
|
398
|
|
|
203
|
|
|
2,939
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,540
|
|
Substandard
|
156
|
|
|
1,506
|
|
|
32,002
|
|
|
—
|
|
|
—
|
|
|
15,412
|
|
|
—
|
|
|
49,076
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
190,731
|
|
|
$
|
493,859
|
|
|
$
|
62,521
|
|
|
$
|
172,151
|
|
|
$
|
39,076
|
|
|
$
|
35,471
|
|
|
$
|
231,587
|
|
|
$
|
1,225,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
1-4 Family
Real Estate
|
|
Commercial and
Multi-Family
Real Estate
|
|
Agricultural
Real Estate
|
|
Consumer
|
|
Commercial
Operating
|
|
Agricultural
Operating
|
|
Premium
Finance
|
|
Total
|
|
(Dollars in Thousands)
|
Pass
|
$
|
161,255
|
|
|
$
|
421,577
|
|
|
$
|
34,421
|
|
|
$
|
37,094
|
|
|
$
|
30,574
|
|
|
$
|
19,669
|
|
|
$
|
171,604
|
|
|
$
|
876,194
|
|
Watch
|
200
|
|
|
72
|
|
|
2,934
|
|
|
—
|
|
|
184
|
|
|
4,625
|
|
|
—
|
|
|
8,015
|
|
Special Mention
|
666
|
|
|
962
|
|
|
25,675
|
|
|
—
|
|
|
—
|
|
|
5,407
|
|
|
—
|
|
|
32,710
|
|
Substandard
|
177
|
|
|
321
|
|
|
582
|
|
|
—
|
|
|
513
|
|
|
7,382
|
|
|
—
|
|
|
8,975
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
162,298
|
|
|
$
|
422,932
|
|
|
$
|
63,612
|
|
|
$
|
37,094
|
|
|
$
|
31,271
|
|
|
$
|
37,083
|
|
|
$
|
171,604
|
|
|
$
|
925,894
|
|
One-to-Four Family Residential Mortgage Lending
. One-to-four family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate and adjustable rate mortgage (“ARM”) loans for both permanent structures and those under construction. The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
The Company originates one-to-four family residential mortgage loans with terms up to a maximum of
30
years and with loan-to-value ratios up to
100%
of the lesser of the appraised value of the security property or the contract price. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the
80%
loan‑to‑value level. Residential loans generally do not include prepayment penalties.
Due to consumer demand, the Company offers fixed-rate mortgage loans with terms up to
30
years, most of which conform to secondary market standards, such as Fannie Mae, Ginnie Mae, and Freddie Mac standards. The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.
The Company also currently offers five- and ten-year ARM loans. These loans have a fixed-rate for the stated period and, thereafter, adjust annually. These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate. As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as the Company’s cost of funds. The Company’s ARMs do not permit negative amortization of principal and are not convertible into fixed-rate loans. The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed-rate residential loans. The current low mortgage interest rate environment makes ARM loans relatively unattractive and very few are currently being originated.
In underwriting one-to-four family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company has not engaged in sub-prime residential mortgage originations.
Commercial and Multi-Family Real Estate Lending
. The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan and participation interests in loans from other financial institutions. The purchased loans and loan participation interests are generally secured by properties primarily located in the Midwest.
The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings and hotels. Commercial and multi-family real estate loans generally are underwritten with terms not exceeding
20
years, have loan-to-value ratios of up to
80%
of the appraised value of the security property, and are typically secured by guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.
Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
Agricultural Lending
. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm-related products. Agricultural operating loans are originated at either an adjustable or fixed rate of interest for up to a
one
year term or, in the case of livestock, upon sale. Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than
one
year. Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to
seven
years.
Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally, such loans provide for a fixed rate of interest for the first
five
to
ten
years, which then balloon or adjust annually thereafter. In addition, such loans generally amortize over a period of
20
to
25
years. Fixed-rate agricultural real estate loans generally have terms up to
ten
years. Agricultural real estate loans are generally limited to
75%
of the value of the property securing the loan.
Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one-to-four family residential lending, but involves a greater degree of risk than one-to-four family residential mortgage loans because of the typically larger loan amount. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by many factors outside the control of the borrower.
Weather presents one of the greatest risks as hail, drought, floods, or other conditions can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral. This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment. Government support programs and the Company generally require that farmers procure crop insurance coverage. Grain and livestock prices also present a risk as prices may decline prior to sale, resulting in a failure to cover production costs. These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk. The Company frequently requires borrowers to use futures contracts or options to reduce price risk and help ensure loan repayment. Another risk is the uncertainty of government programs and other regulations. During periods of low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result. Finally, many farms are dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.
Consumer Lending.
The Bank originates a variety of secured consumer loans, including home equity, home improvement, automobile and boat loans and loans secured by savings deposits. The Bank also offers other secured and unsecured consumer loans and currently originates most of its consumer loans in its primary market area and surrounding areas. In addition, the Bank’s consumer lending portfolio includes a purchased student loan portfolio, along with consumer lending products offered through its payments segment.
The Bank's consumer loan portfolio includes home equity loans and lines of credit. Substantially all of the Bank's home equity loans and lines of credit are secured by second mortgages on principal residences. The Bank will lend amounts which, together with all prior liens, may be up to
90%
of the appraised value of the property securing the loan. Home equity loans and lines of credit generally have maximum terms of
five
years.
The Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers. The Bank’s automobile loans typically are originated at fixed interest rates with terms of up to
60
months for new and used vehicles. Loans secured by automobiles are generally originated for up to
80%
of the N.A.D.A. book value of the automobile securing the loan.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison of the value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
The Bank’s purchased private student loan portfolio is a seasoned portfolio that is serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company. All loans in this portfolio are floating rate and indexed to the three-month LIBOR plus various margins.
Through its Payments segment, the Bank strives to offer consumers innovative payment products, including credit products. Most credit products have fallen into the category of portfolio lending. The Payments segment, including SCS, continues its development of new alternative portfolio lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.
The Payments segment also provides short-term consumer refund advance loans. Taxpayers are underwritten to determine eligibility for the unsecured advances. These consumer loans 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 by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. Generally, when the refund advance loan becomes delinquent for 180 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
Commercial Operating Lending
. The Company also originates commercial operating loans. Most of the Company’s commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable, and operating costs for the Company’s network of tax ERO's. Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is
one
year. The loan-to-value ratio on such loans and lines of credit generally may not exceed
80%
of the value of the collateral securing the loan. ERO loans are not collateralized. The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s credit analysis. As described further below, such loans are believed to carry higher credit risk than more traditional lending activities.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company’s commercial operating loans are usually, but not always, secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Through its payments segment, the Bank also provides short-term ERO advance loans on a nation-wide basis. These loans are typically utilized to purchase tax preparation software and to prepare tax offices for the upcoming season. EROs go through an underwriting process to determine eligibility for the unsecured advances. Collection activities on ERO advances begin once the ERO begins to process refund transfers. Generally, when the ERO advance loan becomes delinquent for 120 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
Premium Finance Lending
. Through its AFS/IBEX division, MetaBank provides short-term and primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk. The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation.
Insurance premium financing is the business of extending credit to a policyholder to pay for insurance premiums when the insurance carrier requires payment in full at inception of coverage. Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally makes a
20%
to
25%
down payment to the insurance broker and finances the remainder over
nine
to
ten
months on average. The down payment is set such that if the policy is canceled, the unearned premium returned is typically sufficient to cover the loan balance, accrued interest and other charges due.
Due to the nature of collateral for commercial premium finance receivables, it customarily takes
60
-
210
days to convert the collateral into cash. In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy and establish a first position lien on the unearned portion of the premium from the insurance carrier. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond
90
days while the insurer is processing the return of the unearned premium. Generally, when a premium finance loan becomes delinquent for
210
days or more, or when collection of principal or interest becomes doubtful, the Company will charge off the loan balance and any remaining interest and fees after applying any collection from the insurance company.
Past due loans at
June 30, 2017
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater Than
90 Days
|
|
Total Past
Due
|
|
Current
|
|
Non-Accrual
Loans
|
|
Total Loans
Receivable
|
|
(Dollars in Thousands)
|
1-4 Family Real Estate
|
$
|
430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
430
|
|
|
$
|
190,242
|
|
|
$
|
59
|
|
|
$
|
190,731
|
|
Commercial and Multi-Family Real Estate
|
—
|
|
|
549
|
|
|
—
|
|
|
549
|
|
|
493,141
|
|
|
169
|
|
|
493,859
|
|
Agricultural Real Estate
|
1,164
|
|
|
2,117
|
|
|
36,208
|
|
|
39,489
|
|
|
23,032
|
|
|
—
|
|
|
62,521
|
|
Consumer
|
666
|
|
|
570
|
|
|
9,372
|
|
|
10,608
|
|
|
161,543
|
|
|
—
|
|
|
172,151
|
|
Commercial Operating
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,076
|
|
|
—
|
|
|
39,076
|
|
Agricultural Operating
|
—
|
|
|
97
|
|
|
—
|
|
|
97
|
|
|
35,374
|
|
|
—
|
|
|
35,471
|
|
Premium Finance
|
100
|
|
|
719
|
|
|
805
|
|
|
1,624
|
|
|
229,963
|
|
|
—
|
|
|
231,587
|
|
Total
|
$
|
2,360
|
|
|
$
|
4,052
|
|
|
$
|
46,385
|
|
|
$
|
52,797
|
|
|
$
|
1,172,371
|
|
|
$
|
228
|
|
|
$
|
1,225,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater Than
90 Days
|
|
Total Past
Due
|
|
Current
|
|
Non-Accrual
Loans
|
|
Total Loans
Receivable
|
|
(Dollars in Thousands)
|
1-4 Family Real Estate
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
162,185
|
|
|
$
|
83
|
|
|
$
|
162,298
|
|
Commercial and Multi-Family Real Estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
422,932
|
|
|
—
|
|
|
422,932
|
|
Agricultural Real Estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
63,612
|
|
|
—
|
|
|
63,612
|
|
Consumer
|
—
|
|
|
—
|
|
|
53
|
|
|
53
|
|
|
37,041
|
|
|
—
|
|
|
37,094
|
|
Commercial Operating
|
151
|
|
|
354
|
|
|
—
|
|
|
505
|
|
|
30,766
|
|
|
—
|
|
|
31,271
|
|
Agricultural Operating
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,083
|
|
|
—
|
|
|
37,083
|
|
Premium Finance
|
1,398
|
|
|
275
|
|
|
965
|
|
|
2,638
|
|
|
168,966
|
|
|
—
|
|
|
171,604
|
|
Total
|
$
|
1,549
|
|
|
$
|
659
|
|
|
$
|
1,018
|
|
|
$
|
3,226
|
|
|
$
|
922,585
|
|
|
$
|
83
|
|
|
$
|
925,894
|
|
When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of
210
days or more for premium finance loans,
180
days or more for refund advance loans,
120
days or more for ERO advance loans and
90
days or more for other loan categories. As of
June 30, 2017
, there were
no
Premium Finance loans greater than
210
days past due.
Total loans past due increased
$49.6 million
to
$52.8 million
at
June 30, 2017
from
$3.2 million
at
September 30, 2016
. The majority of this increase was due to a
$45.4 million
increase in loans greater than 90 days past due. The primary drivers of the increase in loans greater than
90
days past due included
two
well collateralized agricultural loan relationships which are still accruing and are in the process of collection. Also leading to the increase in loans greater than
90
days past due was an increase in tax advance loans that were not repaid according to their terms, for which we are currently over
94%
reserved, and we expect them all to be collected or written off by
September 30, 2017
.
Impaired loans at
June 30, 2017
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Balance
|
|
Unpaid Principal
Balance
|
|
Specific
Allowance
|
June 30, 2017
|
(Dollars in Thousands)
|
Loans without a specific valuation allowance
|
|
|
|
|
|
1-4 Family Real Estate
|
$
|
133
|
|
|
$
|
133
|
|
|
$
|
—
|
|
Commercial and Multi-Family Real Estate
|
1,301
|
|
|
1,301
|
|
|
—
|
|
Total
|
$
|
1,434
|
|
|
$
|
1,434
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Balance
|
|
Unpaid Principal
Balance
|
|
Specific
Allowance
|
September 30, 2016
|
(Dollars in Thousands)
|
Loans without a specific valuation allowance
|
|
|
|
|
|
1-4 Family Real Estate
|
$
|
84
|
|
|
$
|
84
|
|
|
$
|
—
|
|
Commercial and Multi-Family Real Estate
|
433
|
|
|
433
|
|
|
—
|
|
Total
|
$
|
517
|
|
|
$
|
517
|
|
|
$
|
—
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
1-4 Family Real Estate
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
10
|
|
Total
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
10
|
|
The following table provides the average recorded investment in impaired loans for the three and
nine
month periods ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Average
Recorded
Investment
|
|
Average
Recorded
Investment
|
|
Average
Recorded
Investment
|
|
Average
Recorded
Investment
|
|
(Dollars in Thousands)
|
1-4 Family Real Estate
|
$
|
210
|
|
|
$
|
146
|
|
|
$
|
197
|
|
|
$
|
127
|
|
Commercial and Multi-Family Real Estate
|
1,196
|
|
|
1,059
|
|
|
765
|
|
|
1,221
|
|
Agricultural Real Estate
|
388
|
|
|
—
|
|
|
194
|
|
|
—
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial Operating
|
201
|
|
|
5
|
|
|
269
|
|
|
8
|
|
Agricultural Operating
|
715
|
|
|
2,280
|
|
|
358
|
|
|
3,891
|
|
Premium Finance
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,710
|
|
|
$
|
3,490
|
|
|
$
|
1,783
|
|
|
$
|
5,247
|
|
The Company’s troubled debt restructurings (“TDR”) typically involve forgiving a portion of interest or principal on existing loans or making loans at a rate materially less than current market rates.
There were
no
loans modified in a TDR during the three or nine month periods ended
June 30, 2017
or
2016
. Additionally, there were
no
TDR loans for which there was a payment default during the three or nine month periods ended
June 30, 2017
or
2016
that had been modified during the 12-month period prior to the default.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
At
June 30, 2017
, the Company’s allowance for loan losses increased to
$15.0 million
from
$5.6 million
at
September 30, 2016
.
The increase in the allowance was primarily driven by a
$8.6 million
reserve related to a substantial increase in tax season loans. In addition, the downgrade of a significant agriculture relationship during the fiscal second quarter contributed to an increased provision and allowance. Given underlying collateral values related to our agricultural loans, we believe we have minimal loss exposure in the portfolio at this time. During the
nine months ended June 30, 2017
, the Company recorded a provision for loan losses of
$10.7 million
compared to
$4.1 million
for the same period of the prior year. The Company had
$1.4 million
of net charge offs for the nine months ended
June 30, 2017
, compared to
$4.2 million
for the nine months ended
June 30, 2016
.
The allowance for loan losses is established through the 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, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an appropriate loan loss allowance.
Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan losses. The current economic environment continues to show signs of improvement in the Bank’s markets. The Bank’s average loss rates over the past three years were low, offset with a higher agricultural loss rate in fiscal year 2016 driven by the charge off of one relationship. The Bank does not believe it is likely that these low loss conditions will continue indefinitely. Although the Bank’s four market areas have indirectly benefited from a stable agricultural market, the market has become slightly stressed as commodity prices have remained lower than a few years ago. Management expects that future losses in the agriculture operations and agriculture real estate loan portfolios could be higher than recent historical experience. Management believes the low commodity prices and adverse weather conditions have the potential to negatively impact the economies of our agricultural markets.
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
June 30, 2017
, reflects an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition, the Company’s determination of the allowance for loan losses is subject to review by the OCC, which can require the establishment of additional general or specific allowances.
Real estate properties acquired through foreclosure are recorded at the lesser of fair value or the recorded investment. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management and, if the value declines, a specific provision for losses on such property is established by a charge to operations.
NOTE 5. EARNINGS PER COMMON SHARE
Earnings Per Share ("EPS") is computed after deducting dividends. The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the EPS calculation. Basic earnings per share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and after the allocation of earnings to the participating securities. Antidilutive options are disregarded in the EPS calculations.
A reconciliation of net income and common stock share amounts used in the computation of basic and diluted EPS for the three and
nine
months ended
June 30, 2017
and
2016
is presented below.
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
2017
|
|
2016
(1)
|
(Dollars in Thousands, Except Share and Per Share Data)
|
|
|
|
Basic income per common share:
|
|
|
|
Net income attributable to Meta Financial Group, Inc.
|
$
|
9,787
|
|
|
$
|
8,873
|
|
Weighted average common shares outstanding
|
9,349,989
|
|
|
8,512,043
|
|
Basic income per common share
|
1.05
|
|
|
1.04
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
Net income attributable to Meta Financial Group, Inc.
|
$
|
9,787
|
|
|
$
|
8,873
|
|
Weighted average common shares outstanding
|
9,349,989
|
|
|
8,512,043
|
|
Outstanding options - based upon the two-class method
|
60,320
|
|
|
57,175
|
|
Weighted average diluted common shares outstanding
|
9,410,309
|
|
|
8,569,218
|
|
Diluted income per common share
|
1.04
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
2017
|
|
2016
(1)
|
(Dollars in Thousands, Except Share and Per Share Data)
|
|
|
|
Basic income per common share:
|
|
|
|
Net income attributable to Meta Financial Group, Inc.
|
$
|
43,173
|
|
|
$
|
27,214
|
|
Average common shares outstanding
|
9,208,867
|
|
|
8,416,724
|
|
Basic income per common share
|
4.69
|
|
|
3.23
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
Net income attributable to Meta Financial Group, Inc.
|
$
|
43,173
|
|
|
$
|
27,214
|
|
Average common shares outstanding
|
9,208,867
|
|
|
8,416,724
|
|
Outstanding options - based upon the two-class method
|
60,524
|
|
|
51,651
|
|
Average diluted common shares outstanding
|
9,269,391
|
|
|
8,468,375
|
|
Diluted income per common share
|
4.66
|
|
|
3.21
|
|
(1) See Note 1 Basis of Presentation for additional information describing adjustments made to the Company's EPS calculation. June 2016 QTD basic EPS of
$1.05
was corrected to
$1.04
. June 2016 YTD basic EPS of
$3.24
was corrected to
$3.23
and diluted EPS of
$3.22
was corrected to
$3.21
.
NOTE 6. SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale and held to maturity securities at
June 30, 2017
and
September 30, 2016
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale
|
|
|
GROSS
|
|
|
GROSS
|
|
|
|
At June 30, 2017
|
AMORTIZED
COST
|
|
|
UNREALIZED
GAINS
|
|
|
UNREALIZED
(LOSSES)
|
|
|
FAIR
VALUE
|
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
Small business administration securities
|
100,968
|
|
|
1,093
|
|
|
(1
|
)
|
|
102,060
|
|
Non-bank qualified obligations of states and political subdivisions
|
905,504
|
|
|
15,546
|
|
|
(3,175
|
)
|
|
917,875
|
|
Asset-backed securities
|
117,900
|
|
|
2,404
|
|
|
—
|
|
|
120,304
|
|
Mortgage-backed securities
|
672,554
|
|
|
359
|
|
|
(6,489
|
)
|
|
666,424
|
|
Total debt securities
|
1,796,926
|
|
|
19,402
|
|
|
(9,665
|
)
|
|
1,806,663
|
|
Common equities and mutual funds
|
1,040
|
|
|
409
|
|
|
(4
|
)
|
|
1,445
|
|
Total available for sale securities
|
$
|
1,797,966
|
|
|
$
|
19,811
|
|
|
$
|
(9,669
|
)
|
|
$
|
1,808,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
AMORTIZED
COST
|
|
|
GROSS
UNREALIZED
GAINS
|
|
|
GROSS
UNREALIZED
(LOSSES)
|
|
|
FAIR
VALUE
|
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
Trust preferred securities
|
$
|
14,935
|
|
|
$
|
—
|
|
|
$
|
(1,957
|
)
|
|
$
|
12,978
|
|
Small business administration securities
|
78,431
|
|
|
2,288
|
|
|
—
|
|
|
80,719
|
|
Non-bank qualified obligations of states and political subdivisions
|
668,628
|
|
|
30,141
|
|
|
(97
|
)
|
|
698,672
|
|
Asset-backed securities
|
117,487
|
|
|
73
|
|
|
(745
|
)
|
|
116,815
|
|
Mortgage-backed securities
|
555,036
|
|
|
4,382
|
|
|
(478
|
)
|
|
558,940
|
|
Total debt securities
|
1,434,517
|
|
|
36,884
|
|
|
(3,277
|
)
|
|
1,468,124
|
|
Common equities and mutual funds
|
755
|
|
|
373
|
|
|
(3
|
)
|
|
1,125
|
|
Total available for sale securities
|
$
|
1,435,272
|
|
|
$
|
37,257
|
|
|
$
|
(3,280
|
)
|
|
$
|
1,469,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
GROSS
|
|
|
GROSS
|
|
|
|
At June 30, 2017
|
AMORTIZED
COST
|
|
|
UNREALIZED
GAINS
|
|
|
UNREALIZED
(LOSSES)
|
|
|
FAIR
VALUE
|
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
19,509
|
|
|
$
|
176
|
|
|
$
|
(47
|
)
|
|
$
|
19,638
|
|
Non-bank qualified obligations of states and political subdivisions
|
445,220
|
|
|
4,774
|
|
|
(3,519
|
)
|
|
446,475
|
|
Mortgage-backed securities
|
117,399
|
|
|
—
|
|
|
(1,591
|
)
|
|
115,808
|
|
Total held to maturity securities
|
$
|
582,128
|
|
|
$
|
4,950
|
|
|
$
|
(5,157
|
)
|
|
$
|
581,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
AMORTIZED
COST
|
|
|
GROSS
UNREALIZED
GAINS
|
|
|
GROSS
UNREALIZED
(LOSSES)
|
|
|
FAIR
VALUE
|
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
20,626
|
|
|
$
|
355
|
|
|
$
|
(44
|
)
|
|
$
|
20,937
|
|
Non-bank qualified obligations of states and political subdivisions
|
465,469
|
|
|
11,744
|
|
|
(11
|
)
|
|
477,202
|
|
Mortgage-backed securities
|
133,758
|
|
|
708
|
|
|
(31
|
)
|
|
134,435
|
|
Total held to maturity securities
|
$
|
619,853
|
|
|
$
|
12,807
|
|
|
$
|
(86
|
)
|
|
$
|
632,574
|
|
Management has implemented a process to identify securities with potential credit impairment that are other-than-temporary. This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook of the security, 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 the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.
For all securities considered temporarily impaired, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity. The Company believes it will collect all principal and interest due on all investments with amortized cost in excess of fair value and considered only temporarily impaired.
GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: Available for sale (“AFS”), Held to Maturity (“HTM”) or trading. AFS securities are carried at fair value on the consolidated statements of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment. The Company did not have any trading securities at
June 30, 2017
or
September 30, 2016
.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
June 30, 2017
and
September 30, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale
|
LESS THAN 12 MONTHS
|
|
OVER 12 MONTHS
|
|
TOTAL
|
At June 30, 2017
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
Small business administration securities
|
$
|
3,955
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,955
|
|
|
$
|
(1
|
)
|
Non-bank qualified obligations of states and political subdivisions
|
335,226
|
|
|
(3,175
|
)
|
|
—
|
|
|
—
|
|
|
335,226
|
|
|
(3,175
|
)
|
Mortgage-backed securities
|
506,991
|
|
|
(5,760
|
)
|
|
31,857
|
|
|
(729
|
)
|
|
538,848
|
|
|
(6,489
|
)
|
Total debt securities
|
846,172
|
|
|
(8,936
|
)
|
|
31,857
|
|
|
(729
|
)
|
|
878,029
|
|
|
(9,665
|
)
|
Common equities and mutual funds
|
—
|
|
|
—
|
|
|
379
|
|
|
(4
|
)
|
|
379
|
|
|
(4
|
)
|
Total available for sale securities
|
$
|
846,172
|
|
|
$
|
(8,936
|
)
|
|
$
|
32,236
|
|
|
$
|
(733
|
)
|
|
$
|
878,408
|
|
|
$
|
(9,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS THAN 12 MONTHS
|
|
OVER 12 MONTHS
|
|
TOTAL
|
At September 30, 2016
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,978
|
|
|
$
|
(1,957
|
)
|
|
$
|
12,978
|
|
|
$
|
(1,957
|
)
|
Non-bank qualified obligations of states and political subdivisions
|
8,481
|
|
|
(58
|
)
|
|
2,688
|
|
|
(39
|
)
|
|
11,169
|
|
|
(97
|
)
|
Asset-backed securities
|
89,403
|
|
|
(745
|
)
|
|
—
|
|
|
—
|
|
|
89,403
|
|
|
(745
|
)
|
Mortgage-backed securities
|
54,065
|
|
|
(230
|
)
|
|
36,979
|
|
|
(248
|
)
|
|
91,044
|
|
|
(478
|
)
|
Total debt securities
|
151,949
|
|
|
(1,033
|
)
|
|
52,645
|
|
|
(2,244
|
)
|
|
204,594
|
|
|
(3,277
|
)
|
Common equities and mutual funds
|
—
|
|
|
—
|
|
|
125
|
|
|
(3
|
)
|
|
125
|
|
|
(3
|
)
|
Total available for sale securities
|
$
|
151,949
|
|
|
$
|
(1,033
|
)
|
|
$
|
52,770
|
|
|
$
|
(2,247
|
)
|
|
$
|
204,719
|
|
|
$
|
(3,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held To Maturity
|
LESS THAN 12 MONTHS
|
|
OVER 12 MONTHS
|
|
TOTAL
|
At June 30, 2017
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
3,690
|
|
|
$
|
(20
|
)
|
|
$
|
1,764
|
|
|
$
|
(27
|
)
|
|
$
|
5,454
|
|
|
$
|
(47
|
)
|
Non-bank qualified obligations of states and political subdivisions
|
208,852
|
|
|
(3,495
|
)
|
|
1,262
|
|
|
(24
|
)
|
|
210,114
|
|
|
(3,519
|
)
|
Mortgage-backed securities
|
115,808
|
|
|
(1,591
|
)
|
|
—
|
|
|
—
|
|
|
115,808
|
|
|
(1,591
|
)
|
Total held to maturity securities
|
$
|
328,350
|
|
|
$
|
(5,106
|
)
|
|
$
|
3,026
|
|
|
$
|
(51
|
)
|
|
$
|
331,376
|
|
|
$
|
(5,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS THAN 12 MONTHS
|
|
OVER 12 MONTHS
|
|
TOTAL
|
At September 30, 2016
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair Value
|
|
Unrealized
(Losses)
|
|
(Dollars in Thousands)
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
2,909
|
|
|
$
|
(13
|
)
|
|
$
|
2,256
|
|
|
$
|
(31
|
)
|
|
$
|
5,165
|
|
|
$
|
(44
|
)
|
Non-bank qualified obligations of states and political subdivisions
|
1,294
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
1,294
|
|
|
(11
|
)
|
Mortgage-backed securities
|
20,061
|
|
|
(31
|
)
|
|
—
|
|
|
—
|
|
|
20,061
|
|
|
(31
|
)
|
Total held to maturity securities
|
$
|
24,264
|
|
|
$
|
(55
|
)
|
|
$
|
2,256
|
|
|
$
|
(31
|
)
|
|
$
|
26,520
|
|
|
$
|
(86
|
)
|
At
June 30, 2017
, the investment portfolio included securities with current unrealized losses which have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, and because the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may occur at maturity, no other-than-temporary impairment was recorded at
June 30, 2017
.
The amortized cost and fair value of debt securities by contractual maturity as of the dates set forth below are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary. The expected maturities of certain housing related municipal securities, Small Business Administration and asset-backed securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
|
|
|
|
|
|
|
|
|
Available For Sale
|
AMORTIZED
COST
|
|
|
FAIR
VALUE
|
|
|
At June 30, 2017
|
(Dollars in Thousands)
|
|
|
|
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
27,310
|
|
|
28,136
|
|
Due after five years through ten years
|
393,509
|
|
|
404,534
|
|
Due after ten years
|
703,553
|
|
|
707,569
|
|
|
1,124,372
|
|
|
1,140,239
|
|
Mortgage-backed securities
|
672,554
|
|
|
666,424
|
|
Common equities and mutual funds
|
1,040
|
|
|
1,445
|
|
Total available for sale securities
|
$
|
1,797,966
|
|
|
$
|
1,808,108
|
|
|
|
|
|
|
|
|
|
|
|
AMORTIZED
COST
|
|
|
FAIR
VALUE
|
|
At September 30, 2016
|
(Dollars in Thousands)
|
|
|
|
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
17,370
|
|
|
17,897
|
|
Due after five years through ten years
|
426,034
|
|
|
446,771
|
|
Due after ten years
|
436,077
|
|
|
444,516
|
|
|
879,481
|
|
|
909,184
|
|
Mortgage-backed securities
|
555,036
|
|
|
558,940
|
|
Common equities and mutual funds
|
755
|
|
|
1,125
|
|
Total available for sale securities
|
$
|
1,435,272
|
|
|
$
|
1,469,249
|
|
|
|
|
|
|
|
|
|
|
Held To Maturity
|
AMORTIZED
COST
|
|
|
FAIR
VALUE
|
|
|
At June 30, 2017
|
(Dollars in Thousands)
|
|
|
|
|
Due in one year or less
|
$
|
341
|
|
|
$
|
340
|
|
Due after one year through five years
|
17,687
|
|
|
17,859
|
|
Due after five years through ten years
|
152,051
|
|
|
155,002
|
|
Due after ten years
|
294,650
|
|
|
292,912
|
|
|
464,729
|
|
|
466,113
|
|
Mortgage-backed securities
|
117,399
|
|
|
115,808
|
|
Total held to maturity securities
|
$
|
582,128
|
|
|
$
|
581,921
|
|
|
|
|
|
|
|
|
|
|
|
AMORTIZED
COST
|
|
|
FAIR
VALUE
|
|
At September 30, 2016
|
(Dollars in Thousands)
|
Due in one year or less
|
$
|
472
|
|
|
$
|
471
|
|
Due after one year through five years
|
12,502
|
|
|
12,696
|
|
Due after five years through ten years
|
157,944
|
|
|
163,806
|
|
Due after ten years
|
315,177
|
|
|
321,166
|
|
|
486,095
|
|
|
498,139
|
|
Mortgage-backed securities
|
133,758
|
|
|
134,435
|
|
Total held to maturity securities
|
$
|
619,853
|
|
|
$
|
632,574
|
|
NOTE 7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes various commitments to extend credit which are not reflected in the accompanying consolidated financial statements.
At
June 30, 2017
and
September 30, 2016
, unfunded loan commitments approximated $
263.5 million
and
$182.9 million
, respectively, excluding undisbursed portions of loans in process. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract.
The Company had no commitments to purchase or sell securities at
June 30, 2017
or
September 30, 2016
.
The exposure to credit loss in the event of nonperformance by other parties to financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance-sheet instruments.
Since certain commitments to make loans and to fund lines of credit and loans in process expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Legal Proceedings
The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank, BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County, Texas. The Plaintiff’s Second Amended Original Petition and Application for Temporary Restraining Order and Temporary Injunction adds both MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager and processor for both INB and MetaBank. According to the Petition, NetSpend has informed Inter National Bank (“INB”) that the depository accounts at INB for the NetSpend program supposedly contained $
10.5 million
less than they should. INB alleges that NetSpend has breached its fiduciary duty by making affirmative misrepresentations to INB about the safety and stability of the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing procedures. To the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have been unjustly enriched. The Bank is vigorously contesting this matter. In January 2014, NetSpend was granted summary judgment in this matter which is under appeal. Because the theory of liability against both NetSpend and the Bank is the same, the Bank views the NetSpend summary judgment as a positive in support of our position. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.
The Bank commenced action against C&B Farms, LLC, Dakota River Farms, LLC, Dakota Grain Farms, LLC, Heather Swenson and Tracy Clement in early July, 2015, in the Third Judicial Circuit Court of the State of South Dakota, seeking to collect upon certain delinquent loans made in connection with the 2014 farming operations of the
three
identified limited liability companies and the personal guaranties of Swenson and Clement. The
three
companies and Clement answered the Complaint and asserted a counterclaim against the Bank and a third-party claim against the Bank’s loan officer, alleging fraud and misrepresentation, as well as promissory estoppel. On January 7, 2016, the Bank obtained a judgment for
$6.1 million
, the full amount due and owing on the delinquent loans, together with attorneys’ fees, costs and post-judgment interest. On February 25, 2016, the Court entered an order and judgment in favor of the Bank granting the Bank’s renewed motion for summary judgment as to counterclaims and third party claim. Tracy Clement, the primary guarantor of the C&B Farms, Dakota Grain Farms, and Dakota River Farms indebtedness has filed a Chapter 11 bankruptcy proceeding in Minnesota. The Bank is an unsecured creditor in the bankruptcy proceeding. The Bank still has the right to collect from the three limited liability company debtors (C&B, Dakota Grain, and Dakota River). However, the Bank believes each entity is now insolvent and that the collateral has been recovered and liquidated to the extent possible. The Bank has also settled with the other personal guarantor, Heather Swenson. The Bank commenced action against Interstate Commodities, Inc., on February 1, 2016, in the United States District Court for the District of South Dakota, Central Division. This matter arises out of the Bank’s loans to C&B Farms, which were guaranteed by Tracy Clement. The case alleges that Interstate Commodities has breached the terms of a subordination agreement entered into between Interstate Commodities and the Bank relating to the 2015 crops of C&B Farms, LLC. In March 2015, the Bank sent a letter to C&B Farms and Interstate Commodities agreeing that the Bank would subordinate its first position lien in the farm products of C&B Farms once the Bank’s 2015 input advances in an agreed upon sum had been paid in full. Interstate Commodities entered into various agreements with C&B Farms in which they agreed to purchase grain at a future date and provided purchase price advance financing to C&B Farms. Interstate Commodities also partially performed under the subordination agreement by paying or allowing certain sums to flow back to the Bank to pay on the agreed upon inputs. Interstate Commodities terminated the payments to the Bank before allowing full repayment of the 2015 inputs financed by the Bank before the full amount agreed to in the subordination agreement was reached. This large, non-performing agricultural relationship was partially charged off during fiscal year 2016 and has no remaining loan balance.
The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former prepaid program manager of the Bank, which was terminated by the Bank earlier this year. Card Limited alleges that after all of the programs were wound down, there were two accounts with a positive balance to which they are entitled. The Bank’s position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is entitled is
$1,579,398
. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.
Other than the matters set forth above and litigation routine to the Company's or its subsidiaries' respective businesses, there are no other new material pending legal proceedings or updates to which the Company or its subsidiaries is a party.
NOTE 8. STOCK COMPENSATION
The Company maintains the 2002 Omnibus Incentive Plan, as amended and restated, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company. Awards are granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.
Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of the grant. The exercise price of options or fair value of non-vested (restricted) shares granted under the Company’s incentive plan is equal to the fair market value of the underlying stock at the grant date. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.
The following tables show the activity of options and nonvested (restricted) shares granted, exercised, or forfeited under the Company’s 2002 Omnibus Incentive Plan for the
nine
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Yrs)
|
|
Aggregate
Intrinsic
Value
|
|
|
(Dollars in Thousands, Except Share and Per Share Data)
|
Options outstanding, September 30, 2016
|
125,560
|
|
|
$
|
25.73
|
|
|
2.68
|
|
$
|
4,379
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(26,352
|
)
|
|
32.63
|
|
|
|
|
1,682
|
|
Forfeited or expired
|
(16,252
|
)
|
|
24.61
|
|
|
|
|
1,272
|
|
Options outstanding, June 30, 2017
|
82,956
|
|
|
$
|
23.76
|
|
|
2.34
|
|
$
|
5,412
|
|
|
|
|
|
|
|
|
|
Options exercisable, June 30, 2017
|
82,956
|
|
|
$
|
23.76
|
|
|
2.34
|
|
$
|
5,412
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Fair Value
at Grant
|
|
(Dollars in Thousands, Except Share and Per Share Data)
|
Nonvested (restricted) shares outstanding, September 30, 2016
|
20,656
|
|
|
$
|
41.37
|
|
Granted
|
306,604
|
|
|
87.91
|
|
Vested
|
(22,071
|
)
|
|
71.37
|
|
Forfeited or expired
|
(442
|
)
|
|
56.25
|
|
Nonvested (restricted) shares outstanding, June 30, 2017
|
304,747
|
|
|
$
|
86.00
|
|
During the first and second quarters of fiscal 2017, stock awards were granted to the Company's
three
highest paid executive officers in connection with their signing of employment agreements with the Company. These stock awards vest over
eight
years.
At
June 30, 2017
, stock-based compensation expense not yet recognized in income totaled
$19.0 million
, which is expected to be recognized over a weighted average remaining period of
4.07
years.
NOTE 9. SEGMENT INFORMATION
An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.
The following tables present segment data for the Company for the
three and nine
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
Banking
|
|
Corporate
Services/Other
|
|
Total
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
Interest income
|
$
|
3,576
|
|
|
$
|
14,092
|
|
|
$
|
11,193
|
|
|
$
|
28,861
|
|
Interest expense
|
—
|
|
|
717
|
|
|
3,201
|
|
|
3,918
|
|
Net interest income
|
3,576
|
|
|
13,375
|
|
|
7,992
|
|
|
24,943
|
|
Provision for loan losses
|
352
|
|
|
888
|
|
|
—
|
|
|
1,240
|
|
Non-interest income
|
28,934
|
|
|
1,190
|
|
|
696
|
|
|
30,820
|
|
Non-interest expense
|
24,787
|
|
|
5,729
|
|
|
11,703
|
|
|
42,219
|
|
Income (loss) before income tax expense (benefit)
|
7,371
|
|
|
7,948
|
|
|
(3,015
|
)
|
|
12,304
|
|
|
|
|
|
|
|
|
|
Total assets
|
52,276
|
|
|
1,229,533
|
|
|
2,737,884
|
|
|
4,019,693
|
|
Total deposits
|
2,443,332
|
|
|
224,886
|
|
|
485,001
|
|
|
3,153,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
Banking
|
|
Corporate
Services/Other
|
|
Total
|
Nine Months Ended June 30, 2017
|
|
|
|
|
|
|
|
Interest income
|
$
|
9,800
|
|
|
$
|
37,654
|
|
|
$
|
31,700
|
|
|
$
|
79,154
|
|
Interest expense
|
503
|
|
|
1,932
|
|
|
7,977
|
|
|
10,412
|
|
Net interest income
|
9,297
|
|
|
35,722
|
|
|
23,723
|
|
|
68,742
|
|
Provision for loan losses
|
8,566
|
|
|
2,166
|
|
|
—
|
|
|
10,732
|
|
Non-interest income
|
138,420
|
|
|
3,648
|
|
|
271
|
|
|
142,339
|
|
Non-interest expense
|
87,111
|
|
|
17,243
|
|
|
41,564
|
|
|
145,918
|
|
Income (loss) before income tax expense (benefit)
|
52,040
|
|
|
19,961
|
|
|
(17,570
|
)
|
|
54,431
|
|
|
|
|
|
|
|
|
|
Total assets
|
52,276
|
|
|
1,229,533
|
|
|
2,737,884
|
|
|
4,019,693
|
|
Total deposits
|
2,443,332
|
|
|
224,886
|
|
|
485,001
|
|
|
3,153,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
Banking
|
|
Corporate
Services/Other
|
|
Total
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
Interest income
|
$
|
2,579
|
|
|
$
|
9,759
|
|
|
$
|
8,425
|
|
|
$
|
20,763
|
|
Interest expense
|
44
|
|
|
344
|
|
|
456
|
|
|
844
|
|
Net interest income
|
2,535
|
|
|
9,415
|
|
|
7,969
|
|
|
19,919
|
|
Provision for loan losses
|
1
|
|
|
2,097
|
|
|
—
|
|
|
2,098
|
|
Non-interest income
|
22,160
|
|
|
1,296
|
|
|
351
|
|
|
23,807
|
|
Non-interest expense
|
16,231
|
|
|
5,347
|
|
|
10,049
|
|
|
31,627
|
|
Income (loss) before income tax expense (benefit)
|
8,463
|
|
|
3,267
|
|
|
(1,729
|
)
|
|
10,001
|
|
|
|
|
|
|
|
|
|
Total assets
|
48,203
|
|
|
860,493
|
|
|
2,235,470
|
|
|
3,144,166
|
|
Total deposits
|
1,908,961
|
|
|
277,995
|
|
|
—
|
|
|
2,186,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
|
Banking
|
|
Corporate
Services/Other
|
|
Total
|
Nine Months Ended June 30, 2016
|
|
|
|
|
|
|
|
Interest income
|
$
|
7,176
|
|
|
$
|
27,559
|
|
|
$
|
24,932
|
|
|
$
|
59,667
|
|
Interest expense
|
138
|
|
|
913
|
|
|
1,204
|
|
|
2,255
|
|
Net interest income
|
7,038
|
|
|
26,646
|
|
|
23,728
|
|
|
57,412
|
|
Provision for loan losses
|
1,034
|
|
|
3,023
|
|
|
—
|
|
|
4,057
|
|
Non-interest income
|
77,103
|
|
|
3,251
|
|
|
1,188
|
|
|
81,542
|
|
Non-interest expense
|
57,968
|
|
|
15,993
|
|
|
29,464
|
|
|
103,425
|
|
Income (loss) before income tax expense (benefit)
|
25,139
|
|
|
10,881
|
|
|
(4,548
|
)
|
|
31,472
|
|
|
|
|
|
|
|
|
|
Total assets
|
48,203
|
|
|
860,493
|
|
|
2,235,470
|
|
|
3,144,166
|
|
Total deposits
|
1,908,961
|
|
|
277,995
|
|
|
—
|
|
|
2,186,956
|
|
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update (“ASU”) No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU requires organizations to replace the incurred loss impairment methodology with a methodology reflecting expected credit losses with considerations for a broader range of reasonable and supportable information to substantiate credit loss estimates
.
This ASU is effective for annual reporting periods beginning after December 15, 2019, and the Company is currently undertaking a data analysis and taking measures so that its systems capture data applicable to the standard.
ASU No. 2016-04,
Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
This ASU requires organizations to derecognize the deposit liabilities for unredeemed prepaid stored-value products (i.e. – breakage) consistent with breakage guidance in Topic 606,
Revenue from Contracts with Customers.
This ASU is effective for annual reporting periods beginning after December 15, 2017, and the Company expects the impact to the consolidated financial statements to be minimal.
ASU No. 2016-02,
Leases (Topic 842): Amendments to the Leases Analysis
This ASU requires organizations to recognize lease assets and lease liabilities on the balance sheet, along with disclosing key information about leasing arrangements. This update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and the Company has finalized their initial assessment of the ASU and determined the standard will be immaterial to the consolidated financial statements with the Company's current leases.
ASU No. 2014-09,
Revenue Recognition – Revenue from Contracts with Customers (Topic 606)
This ASU provides guidance on when to recognize revenue from contracts with customers. The objective of this ASU is to eliminate diversity in practice related to this topic and to provide guidance that would streamline and enhance revenue recognition requirements. The ASU defines five steps to recognize revenue, including identify the contract with a customer, identify the performance obligations in the contract, determine a transaction price, allocate the transaction price to the performance obligations and then recognize the revenue when or as the entity satisfies a performance obligation. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company is currently assessing all income streams, including different prepaid card programs so as to ascertain how breakage will be recognized under the standard.
ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
This ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2016, and does not have an impact on the consolidated financial statements .
ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
This ASU provides guidance to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes seven aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic companies only); and (7) intrinsic value (nonpublic companies only). This update is effective for annual and interim periods in fiscal years beginning after December 15, 2016, and the Company early adopted the standard in the Company's third quarter of fiscal year 2017. Under the new standard, excess tax benefits and deficiencies related to employee stock-based compensation will be recognized directly within income tax expense or benefit in the Consolidated Statement of Income, rather than within additional paid-in capital. Additionally, as permitted under the new guidance, an accounting policy election was made to account for forfeitures of awards as they occur, which represents a change from the current requirement to estimate forfeitures when recognizing compensation expense. The impact of applying that guidance reduced reported income tax expense by
$0.5 million
for the quarter ended June 30, 2017. All income tax-related cash flows resulting from share-based payments are reported as an operating activity in the consolidated statements of cash flows. The Company elected to adopt the change in cash flow classification on a prospective basis, which resulted in an increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statement of cash flows for the nine months ended June 30, 2017.
ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU addresses eight classification issues related to the statement of cash flows including: debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and the Company is currently assessing the potential impact to the consolidated financial statements.
ASU 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
This ASU requires entities to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments in this update require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and is not expected to have an impact on the consolidated financial statements .
NOTE 11.
FAIR VALUE MEASUREMENTS
Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements
defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
The fair value hierarchy is as follows:
Level 1 Inputs
– Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.
Level 2 Inputs
– Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which significant assumptions are observable in the market.
Level 3 Inputs
– Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Securities Available for Sale and Held to Maturity
. Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The Company’s Level 1 securities include equity securities and mutual funds. Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds, corporate debt securities and trust preferred securities. The Company had no Level 3 securities at
June 30, 2017
or
September 30, 2016
.
The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or valuation based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which significant assumptions are observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third party provider which utilizes several sources for valuing fixed-income securities. These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology, and the third party provider’s own matrix and desk pricing. The Company, no less than annually, reviews the third party’s methods and source’s methodology for reasonableness and to ensure an understanding of inputs utilized in determining fair value. Sources utilized by the third party provider include but are not limited to pricing models that vary based by asset class and include available trade, bid, and other market information. This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. Monthly, the Company receives and compares prices provided by multiple securities dealers and pricing providers to validate the accuracy and reasonableness of prices received from the third party provider. On a monthly basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.
The following table summarizes the fair values of securities available for sale and held to maturity at
June 30, 2017
and
September 30, 2016
. Securities available for sale are measured at fair value on a recurring basis, while securities held to maturity are carried at amortized cost in the consolidated statements of financial condition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At June 30, 2017
|
|
Available For Sale
|
|
Held to Maturity
|
(Dollars in Thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small business administration securities
|
102,060
|
|
|
—
|
|
|
102,060
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Obligations of states and political subdivisions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,638
|
|
|
—
|
|
|
19,638
|
|
|
—
|
|
Non-bank qualified obligations of states and political subdivisions
|
917,875
|
|
|
—
|
|
|
917,875
|
|
|
—
|
|
|
446,475
|
|
|
—
|
|
|
446,475
|
|
|
—
|
|
Asset-backed securities
|
120,304
|
|
|
—
|
|
|
120,304
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
|
666,424
|
|
|
—
|
|
|
666,424
|
|
|
—
|
|
|
115,808
|
|
|
—
|
|
|
115,808
|
|
|
—
|
|
Total debt securities
|
1,806,663
|
|
|
—
|
|
|
1,806,663
|
|
|
—
|
|
|
581,921
|
|
|
—
|
|
|
581,921
|
|
|
—
|
|
Common equities and mutual funds
|
1,445
|
|
|
1,445
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total securities
|
$
|
1,808,108
|
|
|
$
|
1,445
|
|
|
$
|
1,806,663
|
|
|
$
|
—
|
|
|
$
|
581,921
|
|
|
$
|
—
|
|
|
$
|
581,921
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At September 30, 2016
|
|
Available For Sale
|
|
Held to Maturity
|
(Dollars in Thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
$
|
12,978
|
|
|
$
|
—
|
|
|
$
|
12,978
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Small business administration securities
|
80,719
|
|
|
—
|
|
|
80,719
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Obligations of states and political subdivisions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,937
|
|
|
—
|
|
|
20,937
|
|
|
—
|
|
Non-bank qualified obligations of states and political subdivisions
|
698,672
|
|
|
—
|
|
|
698,672
|
|
|
—
|
|
|
477,202
|
|
|
—
|
|
|
477,202
|
|
|
—
|
|
Asset-backed securities
|
116,815
|
|
|
—
|
|
|
116,815
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
|
558,940
|
|
|
—
|
|
|
558,940
|
|
|
—
|
|
|
134,435
|
|
|
—
|
|
|
134,435
|
|
|
—
|
|
Total debt securities
|
1,468,124
|
|
|
—
|
|
|
1,468,124
|
|
|
—
|
|
|
632,574
|
|
|
—
|
|
|
632,574
|
|
|
—
|
|
Common equities and mutual funds
|
1,125
|
|
|
1,125
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total securities
|
$
|
1,469,249
|
|
|
$
|
1,125
|
|
|
$
|
1,468,124
|
|
|
$
|
—
|
|
|
$
|
632,574
|
|
|
$
|
—
|
|
|
$
|
632,574
|
|
|
$
|
—
|
|
Loans.
The Company does not record loans at fair value on a recurring basis. However, if a loan is considered impaired, an allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310,
Receivables
.
The following table summarizes the assets of the Company that were measured at fair value in the consolidated statements of financial condition on a non-recurring basis as of
June 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At June 30, 2017
|
(Dollars in Thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Impaired Loans, net
|
|
|
|
|
|
|
|
Total Impaired Loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreclosed Assets, net
|
$
|
364
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
364
|
|
Total
|
$
|
364
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value At September 30, 2016
|
(Dollars in Thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Impaired Loans, net
|
|
|
|
|
|
|
|
1-4 family residential mortgage loans
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68
|
|
Total Impaired Loans
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
Foreclosed Assets, net
|
76
|
|
|
|
|
|
|
76
|
|
Total
|
$
|
144
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information About Level 3 Fair Value Measurements
|
(Dollars in Thousands)
|
Fair Value at
June 30, 2017
|
|
Fair Value at
September 30, 2016
|
|
Valuation
Technique
|
|
Unobservable Input
|
|
Range of Inputs
|
Impaired Loans, net
|
$
|
—
|
|
|
68
|
|
|
Market approach
|
|
Appraised values
(1)
|
|
4.00 - 10.00%
|
Foreclosed Assets, net
|
$
|
364
|
|
|
76
|
|
|
Market approach
|
|
Appraised values
(1)
|
|
4.00 - 10.00%
|
|
|
(1)
|
The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs in a range of
4%
to
10%
.
|
The following table discloses the Company’s estimated fair value amounts of its financial instruments as of the dates set forth below. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of
June 30, 2017
and
September 30, 2016
, as more fully described below. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values below.
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at
June 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Dollars in Thousands)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
65,630
|
|
|
$
|
65,630
|
|
|
$
|
65,630
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
1,808,108
|
|
|
1,808,108
|
|
|
1,445
|
|
|
1,806,663
|
|
|
—
|
|
Securities held to maturity
|
582,128
|
|
|
581,921
|
|
|
—
|
|
|
581,921
|
|
|
—
|
|
Total securities
|
2,390,236
|
|
|
2,390,029
|
|
|
1,445
|
|
|
2,388,584
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential mortgage loans
|
190,731
|
|
|
188,813
|
|
|
—
|
|
|
—
|
|
|
188,813
|
|
Commercial and multi-family real estate loans
|
493,859
|
|
|
484,155
|
|
|
—
|
|
|
—
|
|
|
484,155
|
|
Agricultural real estate loans
|
62,521
|
|
|
62,275
|
|
|
—
|
|
|
—
|
|
|
62,275
|
|
Consumer loans
|
172,151
|
|
|
173,416
|
|
|
—
|
|
|
—
|
|
|
173,416
|
|
Commercial operating loans
|
39,076
|
|
|
38,965
|
|
|
—
|
|
|
—
|
|
|
38,965
|
|
Agricultural operating loans
|
35,471
|
|
|
35,395
|
|
|
—
|
|
|
—
|
|
|
35,395
|
|
Premium finance loans
|
231,587
|
|
|
231,573
|
|
|
—
|
|
|
—
|
|
|
231,573
|
|
Total loans receivable
|
1,225,396
|
|
|
1,214,592
|
|
|
—
|
|
|
—
|
|
|
1,214,592
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
16,323
|
|
|
16,323
|
|
|
—
|
|
|
16,323
|
|
|
—
|
|
Accrued interest receivable
|
21,831
|
|
|
21,831
|
|
|
21,831
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
2,481,673
|
|
|
2,481,673
|
|
|
2,481,673
|
|
|
—
|
|
|
—
|
|
Interest bearing demand deposits, savings, and money markets
|
142,929
|
|
|
142,929
|
|
|
142,929
|
|
|
—
|
|
|
—
|
|
Certificates of deposit
|
83,760
|
|
|
83,190
|
|
|
—
|
|
|
83,190
|
|
|
—
|
|
Wholesale non-maturing deposits
|
23,505
|
|
|
23,505
|
|
|
23,505
|
|
|
—
|
|
|
—
|
|
Wholesale certificates of deposit
|
421,352
|
|
|
420,680
|
|
|
—
|
|
|
420,680
|
|
|
—
|
|
Total deposits
|
3,153,219
|
|
|
3,151,977
|
|
|
2,648,107
|
|
|
503,870
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Advances from Federal Home Loan Bank
|
7,000
|
|
|
7,807
|
|
|
—
|
|
|
7,807
|
|
|
—
|
|
Federal funds purchased
|
275,000
|
|
|
275,000
|
|
|
275,000
|
|
|
—
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
2,100
|
|
|
2,100
|
|
|
—
|
|
|
2,100
|
|
|
—
|
|
Capital lease
|
1,958
|
|
|
1,958
|
|
|
—
|
|
|
1,958
|
|
|
—
|
|
Trust preferred securities
|
10,310
|
|
|
10,446
|
|
|
—
|
|
|
10,446
|
|
|
—
|
|
Subordinated debentures
|
73,312
|
|
|
75,750
|
|
|
—
|
|
|
75,750
|
|
|
—
|
|
Accrued interest payable
|
2,463
|
|
|
2,463
|
|
|
2,463
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Dollars in Thousands)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
773,830
|
|
|
$
|
773,830
|
|
|
$
|
773,830
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
1,469,249
|
|
|
1,469,249
|
|
|
1,125
|
|
|
1,468,124
|
|
|
—
|
|
Securities held to maturity
|
619,853
|
|
|
632,574
|
|
|
—
|
|
|
632,574
|
|
|
—
|
|
Total securities
|
2,089,102
|
|
|
2,101,823
|
|
|
1,125
|
|
|
2,100,698
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential mortgage loans
|
162,298
|
|
|
163,886
|
|
|
—
|
|
|
—
|
|
|
163,886
|
|
Commercial and multi-family real estate loans
|
422,932
|
|
|
422,307
|
|
|
—
|
|
|
—
|
|
|
422,307
|
|
Agricultural real estate loans
|
63,612
|
|
|
63,868
|
|
|
—
|
|
|
—
|
|
|
63,868
|
|
Consumer loans
|
37,094
|
|
|
36,738
|
|
|
—
|
|
|
—
|
|
|
36,738
|
|
Commercial operating loans
|
31,271
|
|
|
31,108
|
|
|
—
|
|
|
—
|
|
|
31,108
|
|
Agricultural operating loans
|
37,083
|
|
|
36,897
|
|
|
—
|
|
|
—
|
|
|
36,897
|
|
Premium finance loans
|
171,604
|
|
|
172,000
|
|
|
—
|
|
|
—
|
|
|
172,000
|
|
Total loans receivable
|
925,894
|
|
|
926,803
|
|
|
—
|
|
|
—
|
|
|
926,803
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
47,512
|
|
|
47,512
|
|
|
—
|
|
|
47,512
|
|
|
—
|
|
Accrued interest receivable
|
17,199
|
|
|
17,199
|
|
|
17,199
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits
|
2,167,522
|
|
|
2,167,522
|
|
|
2,167,522
|
|
|
—
|
|
|
—
|
|
Interest bearing demand deposits, savings, and money markets
|
136,568
|
|
|
136,568
|
|
|
136,568
|
|
|
—
|
|
|
—
|
|
Certificates of deposit
|
125,992
|
|
|
125,772
|
|
|
—
|
|
|
125,772
|
|
|
—
|
|
Total deposits
|
2,430,082
|
|
|
2,429,862
|
|
|
2,304,090
|
|
|
125,772
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Advances from Federal Home Loan Bank
|
107,000
|
|
|
108,168
|
|
|
—
|
|
|
108,168
|
|
|
—
|
|
Federal funds purchased
|
992,000
|
|
|
992,000
|
|
|
992,000
|
|
|
—
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
3,039
|
|
|
3,039
|
|
|
—
|
|
|
3,039
|
|
|
—
|
|
Capital lease
|
2,018
|
|
|
2,018
|
|
|
—
|
|
|
2,018
|
|
|
—
|
|
Trust preferred securities
|
10,310
|
|
|
10,437
|
|
|
—
|
|
|
10,437
|
|
|
—
|
|
Subordinated debentures
|
73,211
|
|
|
77,250
|
|
|
—
|
|
|
77,250
|
|
|
—
|
|
Accrued interest payable
|
875
|
|
|
875
|
|
|
875
|
|
|
—
|
|
|
—
|
|
The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at
June 30, 2017
and
September 30, 2016
.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair values for investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.
LOANS RECEIVABLE, NET
The fair value of loans is estimated using a historical or replacement cost basis concept (
i.e.,
an entrance price concept). The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers and for similar remaining maturities. When using the discounting method to determine fair value, homogeneous loans with similar terms and conditions were grouped together and discounted at a target rate at which similar loans would be made to borrowers at
June 30, 2017
or
September 30, 2016
. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value as a result of the discounted cash flow which approximates the fair value adjustment for the credit quality component.
FEDERAL HOME LOAN BANK (“FHLB”) STOCK
The fair value of FHLB stock is assumed to approximate book value since the Company is only able to redeem this stock at par value.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to approximate the fair value.
DEPOSITS
The carrying values of non-interest bearing checking deposits, interest bearing checking deposits, savings, money markets, and wholesale non-maturing deposits are assumed to approximate fair value, since such deposits are immediately withdrawable without penalty. The fair value of time certificates of deposit and wholesale certificates of deposit were estimated by discounting expected future cash flows by the current rates offered on certificates of deposit with similar remaining maturities.
In accordance with ASC 825,
Financial Instruments
, no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangibles are not financial instruments as defined under ASC 825.
ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.
NOTE 12. GOODWILL AND INTANGIBLE ASSETS
The Company held a total of $
98.7 million
of goodwill as of
June 30, 2017
. The recorded goodwill was due to two separate business combinations during fiscal 2015 and two separate business combinations during the first quarter of fiscal 2017: $
11.6 million
of goodwill in connection with the purchase of substantially all of the commercial loan portfolio and related assets of AFS/IBEX on December 2, 2014; $
25.4 million
of goodwill in connection with the purchase of substantially all of the assets and liabilities of Refund Advantage on September 8, 2015;
$30.4 million
of goodwill in connection with the purchase of substantially all of the assets of EPS on November 1, 2016; and
$31.4 million
of goodwill in connection with the purchase of substantially all of the assets and specified liabilities of SCS on December 14, 2016. The goodwill associated with these transactions is deductible for tax purposes.
The changes in the carrying amount of the Company’s goodwill and intangible assets for the
nine months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Goodwill
|
|
|
|
Balance as of September 30,
|
$
|
36,928
|
|
|
$
|
36,928
|
|
Acquisitions during the period
|
61,795
|
|
|
—
|
|
Write-offs during the period
|
—
|
|
|
—
|
|
Balance as of June 30,
|
$
|
98,723
|
|
|
$
|
36,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
(1)
|
|
Non-Compete
(2)
|
|
Customer
Relationships
(3)
|
|
All Others
(4)
|
|
Total
|
Intangibles
|
|
Balance as of September 30, 2016
|
$
|
5,149
|
|
|
$
|
127
|
|
|
$
|
20,590
|
|
|
$
|
3,055
|
|
|
$
|
28,921
|
|
Acquisitions during the period
|
5,500
|
|
|
2,180
|
|
|
31,770
|
|
|
6,922
|
|
|
46,372
|
|
Amortization during the period
|
(442
|
)
|
|
(371
|
)
|
|
(9,084
|
)
|
|
(598
|
)
|
|
(10,495
|
)
|
Write-offs during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of June 30, 2017
|
$
|
10,207
|
|
|
$
|
1,936
|
|
|
$
|
43,276
|
|
|
$
|
9,379
|
|
|
$
|
64,798
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
10,990
|
|
|
$
|
2,480
|
|
|
$
|
57,810
|
|
|
$
|
10,478
|
|
|
$
|
81,758
|
|
Accumulated amortization
|
$
|
(783
|
)
|
|
$
|
(544
|
)
|
|
$
|
(14,534
|
)
|
|
$
|
(1,099
|
)
|
|
$
|
(16,960
|
)
|
Balance as of June 30, 2017
|
$
|
10,207
|
|
|
$
|
1,936
|
|
|
$
|
43,276
|
|
|
$
|
9,379
|
|
|
$
|
64,798
|
|
(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3-5 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
(1)
|
|
Non-Compete
(2)
|
|
Customer
Relationships
(3)
|
|
All Others
(4)
|
|
Total
|
Intangibles
|
|
Balance as of September 30, 2015
|
$
|
5,439
|
|
|
$
|
227
|
|
|
$
|
24,811
|
|
|
$
|
3,100
|
|
|
$
|
33,577
|
|
Acquisitions during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
155
|
|
|
155
|
|
Amortization during the period
|
(216
|
)
|
|
(75
|
)
|
|
(3,191
|
)
|
|
(162
|
)
|
|
(3,644
|
)
|
Write-offs during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of June 30, 2016
|
$
|
5,223
|
|
|
$
|
152
|
|
|
$
|
21,620
|
|
|
$
|
3,093
|
|
|
$
|
30,088
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
5,490
|
|
|
$
|
300
|
|
|
$
|
26,040
|
|
|
$
|
3,539
|
|
|
$
|
35,369
|
|
Accumulated amortization
|
$
|
(267
|
)
|
|
$
|
(148
|
)
|
|
$
|
(4,420
|
)
|
|
$
|
(446
|
)
|
|
$
|
(5,281
|
)
|
Balance as of June 30, 2016
|
$
|
5,223
|
|
|
$
|
152
|
|
|
$
|
21,620
|
|
|
$
|
3,093
|
|
|
$
|
30,088
|
|
(1) Book amortization period of 15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in the remaining period of fiscal 2017 and subsequent fiscal years is as follows:
|
|
|
|
|
|
(Dollars in Thousands)
|
Remaining in 2017
|
$
|
1,828
|
|
2018
|
11,855
|
|
2019
|
9,073
|
|
2020
|
7,292
|
|
2021
|
6,338
|
|
2022
|
5,030
|
|
Thereafter
|
23,382
|
|
Total anticipated intangible amortization
|
$
|
64,798
|
|
The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment. There were
no
impairments to intangible assets during the three or nine months ended
June 30, 2017
or
2016
. The annual goodwill impairment test for fiscal 2017 will be conducted at
September 30, 2017
.
NOTE 13. REGULATORY MATTERS AND SETTLEMENT OF OTS ENFORCEMENT ACTIONS
On January 5, 2015, the Federal Deposit Insurance Corporation (“FDIC”) published industry guidance in the form of Frequently Asked Questions (“FAQs”) with respect to the categorization of deposit liabilities as “brokered” deposits. On November 13, 2015, the FDIC issued for comment updated and annotated FAQs, and on June 30, 2016, the FDIC finalized the FAQs. The Company believes that the final FAQs do not materially impact the processes that it uses to identify, accept and report brokered deposits. On April 26, 2016, the FDIC issued a final rule to amend how small banks (less than
$10 billion
in assets that have been FDIC insured for at least
five
years) are assessed for deposit insurance (the "Final Rule"). The Final Rule imposes higher assessments for banks that the FDIC believes present higher risk profiles. The Final Rule became effective with the Bank's December 2016 assessment invoice, which the Company received in March 2017.
Due to the Bank’s status as a "well-capitalized" institution under the FDIC's prompt corrective action regulations, and further with respect to the Bank’s financial condition in general, the Company does not at this time anticipate that either the FAQs or the Final Rule will have a material adverse impact on the Company’s business operations. However, should the Bank ever fail to be well-capitalized in the future, as a result of failing to meet the well-capitalized requirements, or the imposition of an individual minimum capital requirement or similar formal requirements, then, notwithstanding that the Bank has capital in excess of the well-capitalized minimum requirements, the Bank would be prohibited, absent waiver from the FDIC, from utilizing brokered deposits (i.e., may not accept, renew or rollover brokered deposits), which could produce serious adverse effects on the Company’s liquidity, and financial condition and results of operations. Similarly, should the Bank’s financial condition in general deteriorate, future FDIC assessments could have a material adverse effect on the Company.
On July 10, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued its final rule with respect to the use of class action waivers in consumer arbitration agreements (“Rule”). As a result, the Rule will require that the Bank (i) no longer include a class action waiver provision in most of its contracts for consumer financial products and services offered by the Bank, including its prepaid card agreements and unsecured consumer loan agreements, and (ii) insert specific language into its arbitration provision that discloses to the consumer that the arbitration provision cannot be used to block or impede their participation in a class action. Additionally, to the extent that the Bank participates in individual arbitrations with consumers after the effective date of the Rule, it will be required to submit most data related to such arbitration to the CFPB for its review and analysis within 60 days of such data’s submission to an arbitrator or a court.
The Rule will apply to consumer product agreements (including consumer loan and prepaid agreements) 241 days after publication of the Rule in the Federal Register. However, as of the date of this filing, it is possible that the Rule will be blocked by legislative or other action. Regardless of this possibility, the Bank has begun to review the products and services to which the Rule will apply and has begun to identify the processes and procedures needed to implement the Rule across the Bank’s affected product portfolio.
NOTE 14. SUBSEQUENT EVENTS
On July 27, 2017, the Company was advised they will not be providing interest-free Refund Advance loans for H&R Block tax preparation customers during the 2018 tax season. The Company’s relationship with H&R Block represented approximately
$12.0 million
in net earnings during fiscal year 2017. Given the loss of this relationship, the Company is reviewing the carrying value of intangible assets for potential impairment. The Company preliminarily estimates a pre-tax impairment charge of
$10.7 million
that would be recognized in the fourth quarter of fiscal 2017.
On August 2, 2017, the Company's bank subsidiary, MetaBank, entered into an extension to its current agreement with Jackson Hewitt Tax Service
®
to offer on an annual basis up to
$750 million
of interest-free refund advance loans, an increase of
$300 million
in available funds over last year. The agreement includes underwriting, origination, servicing, and loan retention, and is supported by Specialty Consumer Services, a division of MetaBank. Under the extended agreement, MetaBank will continue to provide these services through the 2020 tax season.