UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
META FINANCIAL GROUP, INC. (R)
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
121 East Fifth Street, Storm Lake, Iowa 50588
---------------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b2 of the Exchange Act. (Check
one):
Large accelerated filer[ ] Accelerated filer[ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at February 14, 2007:
Common Stock, $.01 par value 2,551,573 Common Shares
META FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
-------------------------------
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial Condition
at December 31, 2006 and September 30, 2006 3
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 2006 and 2005 4
Condensed Consolidated Statements of Comprehensive (Loss) for the
Three Months Ended December 31, 2006 and 2005 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended December 31, 2006 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2006 and 2005 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
Item 4. Controls and Procedures 24
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 25
Item 1.A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 29
2
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
Dollars in Thousands
ASSETS December 31, 2006 September 30, 2006
-----------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 1,519 $ 7,405
Interest-bearing deposits in other financial institutions 99,811 101,948
----------------------------------------
Total cash and cash equivalents 101,330 109,353
Federal funds sold 50,000 --
Securities purchased under agreements to resell -- 5,891
Other investment securities available for sale 27,420 27,474
Mortgage backed securities available for sale 153,486 158,702
Loans held for sale 1,058 508
Loans receivable - net of allowance for loan losses of
$10,349 at December 31, 2006 and $5,968 at September 30, 2006 369,277 388,762
Federal Home Loan and Federal Reserve Bank stock, at cost 5,017 5,768
Accrued interest receivable 4,233 4,379
Premises and equipment, net 18,006 17,623
Bank owned life insurance 13,028 12,953
Goodwill 3,403 3,403
Other assets 8,253 6,795
----------------------------------------
Total assets $ 754,511 $ 741,611
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest-bearing checking $ 262,898 $ 189,506
Interest-bearing checking 28,942 26,828
Savings deposits 24,866 29,869
Money market deposits 65,616 103,291
Time certificates of deposit 217,333 216,217
----------------------------------------
Total deposits 599,655 565,711
Advances from Federal Home Loan Bank 85,700 99,565
Securities sold under agreements to repurchase 10,406 15,179
Subordinated debentures 10,310 10,310
Accrued interest payable 1,234 972
Accrued expenses and other liabilities 3,582 4,542
----------------------------------------
Total liabilities 710,887 696,279
----------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value; 5,200,000 shares authorized,
2,957,999 shares issued, 2,539,326 and 2,534,367 shares outstanding
at December 31, 2006 and September 30, 2006, respectively 30 30
Additional paid-in capital 20,973 20,969
Retained earnings - substantially restricted 33,599 37,186
Accumulated other comprehensive (loss) (2,842) (4,548)
Unearned Employee Stock Ownership Plan shares (444) (509)
Treasury stock, 418,673 and 423,632 common shares, at cost,
at December 31, 2006 and September 30, 2006, respectively (7,692) (7,796)
----------------------------------------
Total shareholders' equity 43,624 45,332
----------------------------------------
Total liabilities and shareholders' equity $ 754,511 $ 741,611
========================================
See Notes to Condensed Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Dollars in Thousands, except per share data
Three Months Ended
December 31,
2006 2005
------------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable, including fees $ 6,876 $ 7,587
Mortgage backed securities 1,606 1,833
Other investments 1,895 757
--------------------
10,377 10,177
--------------------
Interest expense:
Deposits 3,503 3,347
FHLB advances and other borrowings 1,615 2,110
--------------------
5,118 5,457
--------------------
Net interest income 5,259 4,720
Provision for loan losses 5,465 40
--------------------
Net interest income (expense) after provision for loan losses (206) 4,680
--------------------
Non-interest income:
Deposit Fees 236 261
Loan Fees 59 142
Card fees 3,408 1,223
Bank owned life insurance income 75 146
Other income 183 73
--------------------
Total non-interest income 3,961 1,845
--------------------
Non-interest expense:
Compensation and benefits 4,034 3,068
Occupancy and equipment expense 967 764
Marketing 243 131
Data processing expense 177 193
Card processing expense 1,653 333
Legal and consulting expense 736 591
Other expense 1,020 711
--------------------
Total non-interest expense 8,830 5,791
--------------------
Net income (loss) before income tax expense (benefit) (5,075) 734
Income tax expense (benefit) (1,821) 219
--------------------
Net income (loss) (3,254) 515
====================
Earnings (loss) per common share:
Basic $ (1.30) $ 0.21
====================
Diluted (1.30) 0.21
====================
Dividends declared per common share: $ 0.13 $ 0.13
====================
See Notes to Condensed Consolidated Financial Statements.
4
META FINANCIAL GROUP INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) (Unaudited)
Dollars in Thousands
Three Months Ended
December 31,
2006 2005
--------------------------------------------------------------------------------
Net income (loss) $ (3,254) $ 515
Other comprehensive gain (loss):
Net unrealized gain (loss) on
securities available for sale 2,721 (1,719)
Deferred income tax (expense) benefit 1,015 (640)
--------------------
Total other comprehensive income (loss) 1,706 (1,079)
--------------------
Total comprehensive (loss) $ (1,548) $ (564)
====================
See Notes to Condensed Consolidated Financial Statements.
5
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 2006
Dollars in Thousands
Accumulated Unearned
Other Employee
Additional Comprehensive Stock Total
Common Paid-in Retained (Loss), Ownership Treasury Shareholders'
Stock Capital Earnings Net of Tax Plan Shares Stock Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 $ 30 $ 20,646 $ 34,557 $ (3,180) $ (825) $ (8,269) $ 42,959
Cash dividends declared on common
stock ($.13 per share) -- -- (325) -- -- -- (325)
5,100 common shares committed to be
released under the ESOP -- (10) -- -- 114 -- 104
Net change in unrealized losses on
securities available for sale,
net of income taxes -- -- -- (1,079) -- -- (1,079)
Net income for three months ended
December 31, 2005 -- -- 515 -- -- -- 515
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ 30 $ 20,636 $ 34,747 $ (4,259) $ (711) $ (8,269) $ 42,174
===================================================================================================================================
Balance, September 30, 2006 $ 30 $ 20,969 $ 37,186 $ (4,548) $ (509) $ (7,796) $ 45,332
Cash dividends declared on common
stock ($.13 per share) -- -- (333) -- -- -- (333)
Issuance of 5,636 common shares from
treasury stock due to exercise of stock
options -- (70) -- -- -- 104 34
Stock compensation -- 51 -- -- -- -- 51
3,999 common shares committed to be
released under the ESOP -- 23 -- -- 65 -- 88
Net change in unrealized losses on
securities available for sale,
net of income taxes -- -- -- 1,706 -- -- 1,706
Net (loss) for three months ended
December 31, 2006 -- -- (3,254) -- -- -- (3,254)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 30 $ 20,973 $ 33,599 $ (2,842) $ (444) $ (7,692) $ 43,624
===================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Dollars in Thousands
Three Months Ended December 31,
2006 2005
----------------------------------------------------------------------------------------------------------
Cash Flows from operating activities:
Net income (loss) $ (3,254) $ 515
Adjustments to reconcile net income to net cash from operating activities:
Effect of contribution to employee stock ownership plan 88 104
Depreciation, amortization and accretion, net 552 682
Provision for loan losses 5,465 40
Stock compensation 51 25
Net change in loans held for sale (553) 3
(Gain) loss on sales of foreclosed real estate, net (2) (3)
(Gain) on sales of loans, net (3) (14)
Net change in accrued interest receivable 146 166
Net change in other assets (1,533) (328)
Net change in accrued interest payable 262 (234)
Net change in accrued expenses and other liabilities (960) 458
----------------------------
Net cash provided by operating activities 259 1,414
Cash flow from investing activities:
Purchase of securities available for sale -- (108)
Net change in federal funds sold (50,000) --
Net change in securities purchased under agreement to resell 5,891 (4,882)
Proceeds from maturities and principal repayments of
securities available for sale 7,206 13,020
Loans purchased (21,346) (9,968)
Net change in loans receivable 36,450 29,354
Proceeds from sales of foreclosed real estate 15 2,134
Net change in FHLB / FRB stock (751) 1,070
Purchase of premises and equipment (734) (808)
----------------------------
Net cash provided by (used in) investing activities (23,269) 29,812
Cash flows from financing activities:
Net change in checking, savings, and money market deposits 32,828 36,713
Net change in time deposits 1,116 (26,978)
Repayments of advances from Federal Home Loan Bank (13,865) (24,950)
Net change in securities sold under agreements to repurchase (4,773) (5,290)
Cash dividends paid (333) (325)
Proceeds from exercise of stock options 14 --
----------------------------
Net cash provided by (used in) financing activities 14,987 (20,830)
----------------------------
Net change in cash and cash equivalents (8,023) 10,396
Cash and cash equivalents at beginning of period 109,353 14,370
----------------------------
Cash and cash equivalents at end of period $ 101,330 $ 24,766
============================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 4,856 $ 5,690
Income taxes 570 0
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ -- $ 23,861
See Notes to Condensed Consolidated Financial Statements.
7
META FINANCIAL GROUP, INC. (R)
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by Meta
Financial Group , Inc. ("Meta Group" or the "Company") and its
consolidated subsidiaries, MetaBank, MetaBank West Central ("MetaBank
WC"), Meta Trust Company ("Meta Trust"), First Services Financial
Limited, and Brookings Service Corporation are consistent with the
accounting policies followed for annual financial reporting. All
adjustments that, in the opinion of management, are necessary for a
fair presentation of the results for the periods reported have been
included in the accompanying unaudited condensed consolidated financial
statements, and all such adjustments are of a normal recurring nature.
The accompanying condensed consolidated statement of financial
condition as of September 30, 2006, which has been derived from audited
financial statements, and the unaudited interim condensed financial
statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and note
disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest shareholders' annual report (Form 10-K).
2. ALLOWANCE FOR LOAN LOSSES
At December 31, 2006 the Company's Allowance for Loan Losses was $10.3
million, an increase of $4.3 million from $6.0 million at September 30,
2006. During the three months ended December 31, 2006 the Company
recorded a provision for loan losses of $5.46 million, which was
primarily related to the impairment of two commercial lending
relationships. The Company also incurred net loan charge-offs of $1.08
million, primarily related to the recognition of a loss on one of these
relationships. Further discussion of this change in the Allowance is
included in "Corporate Developments and Overview" and "Non-performing
Assets and Allowance for Loan Loss" in Management's Discussion and
Analysis.
The following table sets forth an analysis of the activity in the
Company's allowance for loan losses for the three month periods ended
December 31, 2006 and 2005.
Three Months Ended
December 31,
------------
(Dollars in thousands) 2006 2005
---------------------- ---- ----
Beginning balance $ 5,968 $ 7,222
Provision charged to operations 5,465 41
Loans charged-off (1,093) (8)
Recoveries 9 2
---------- ----------
Ending balance $ 10,349 $ 7,257
========== ==========
3. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional common
shares issuable pursuant to stock options agreements.
8
A reconciliation of the numerators and denominators used in the basic
earnings per common share and the diluted earnings per common share
computations for the three months ended December 31, 2006 and 2005 is
presented below.
Three Months Ended December 31, 2006 2005
-------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Except Per Share Amounts
Basic earnings (loss) per common share:
Numerator, net income (loss) $ (3,254) $ 515
============================================================================================================
Denominator, weighted average common shares outstanding 2,535 2,504
Less weighted average unallocated ESOP and nonvested shares (29) (35)
-------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,506 2,469
============================================================================================================
Basic earnings (loss) per common share $ (1.30) $ 0.21
Diluted earnings (loss) per common share:
Numerator, net income (loss) $ (3,254) $ 515
============================================================================================================
Denominator, weighted average common shares outstanding for basic
earnings per common share 2,506 2,469
Add dilutive effect of assumed exercises of stock options, net of tax benefits -- 38
-------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential common shares outstanding 2,506 2,507
============================================================================================================
Diluted earnings (loss) per common share $ (1.30) $ 0.21
============================================================================================================
4. COMMITMENTS AND CONTINGENCIES
At December 31, 2006 and September 30, 2006, the Company had
outstanding commitments to originate and purchase loans totaling $50.3
million and $52.9 million, respectively. It is expected that
outstanding loan commitments will be funded with existing liquid
assets.
Legal Proceedings
MetaBank has been named in several lawsuits whose eventual outcome
could have an adverse effect on the consolidated financial position or
results of operations of the Company. Because the likelihood or amount
of an adverse resolution to these matters cannot currently be assessed,
the Company has not recorded a contingent liability related to these
potential claims.
On June 11, 2004, the Sioux Falls School District filed suit in the
Second Judicial Circuit Court alleging that MetaBank, a wholly-owned
subsidiary of the Company, improperly allowed funds, which belonged to
the school district, to be deposited into, and subsequently withdrawn
from, a corporate account established by an employee of the school
district. The school district is seeking in excess of $600,000.
MetaBank has submitted the claim to its insurance carrier, and is
working with counsel to vigorously contest the suit.
On or about March 10, 2006, plaintiffs filed five class-action suits on
behalf of themselves and all other purchasers of vehicles from Prairie
Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s Rapid City, South
Dakota location, and other not-yet-identified auto sales entities owned
or operated by defendants. The complaints are styled as follows: Ronald
Archulleta, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Oglala Sioux Tribe, Pine Ridge Indian Reservation; Cedar
Around Him, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Rosebud Sioux Tribe, Rosebud Indian Reservation; Chris
Dengler, et al. v. Prairie Auto Group, Inc. - Circuit Court of the
Second Judicial Circuit, Minnehaha County, South Dakota; Lucinda Janis,
et al. v. Prairie Auto Group, Inc., et al. - File No. C-157-04; In the
Tribal Court for the Cheyenne River Sioux Indian Reservation, Eagle
Butte, South Dakota; and Kali Treetop, et al. v. Prairie Auto Group,
Inc., et al. - File No. 01-970; Circuit Court for the Seventh Judicial
Circuit, Pennington County, South Dakota. Except for the named
plaintiffs, each of the complaints is essentially identical to the
others. The nature of the allegations are the same, and the same
fourteen legal claims are sought to be pled in each.
Each complaint states that it is a "companion" to the other four and
names the same defendants (approximately twenty-five) including the
Registrant and affiliates thereof (the "MetaBank Defendants"). None of
these complaints has yet been served on any of the MetaBank Defendants.
The thrust of the complaints is that plaintiffs allegedly suffered
damages as a result of a scheme by defendants to use fraudulent
statements, misrepresentations and omissions to sell vehicles and
extended warranties to plaintiffs. Plaintiffs claim that they and other
similarly situated purchasers paid too much for their vehicles and were
induced to buy warranties that were not honored and otherwise proved
worthless. Plaintiffs allege that defendants reaped considerable
profits through fraudulent sales methods; by refusing to make
warrantied repairs; and by engaging in usurious repossession and resale
practices. Plaintiffs allege that these practices were part of a
business plan that originated with the franchisor-defendants and was
9
purchased and employed by the franchisee-defendants. It appears that
the principal basis for naming the MetaBank Defendants is that they
loaned money to finance some of the defendants' business operations,
purportedly with some degree of knowledge about the defendants'
allegedly abusive consumer practices.
The complaints allege that the described transactions are typical of
defendants' business and were part of a deliberate scheme directed
primarily at Native American customers. The complaints allege that the
franchisee-defendants engaged in coercive, fraudulent and other illegal
activities in connection with the automobile sales, and each seeks to
state claims for: (1) breach of express warranty; (2) breach of implied
warranty of merchantability; (3) deceit/fraud; (4) violation of
applicable deceptive trade laws; (5) breach of the implied covenant of
good faith and fair dealing; (6) conversion; (7) civil conspiracy under
tribal and state common law; (8) negligent hiring, training and
supervision of employees; (9) violation of the Federal Equal Credit
Opportunity Act; (10) invasion of privacy; (11) violation of the
Racketeer Influenced and Corrupt Organizations Act (RICO); (12)
violation of the Magnuson-Moss Act; (13) violation of the Federal Truth
and Lending Act's (TILA) Three Day Rescission Period; and (14)
violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary damages
including the initial purchase price warranty charges, finance costs
and related repossession and other charges; costs of allegedly
warrantied repairs that were not made by defendants; consequential
damages relating to the alleged wrongful repossession of vehicles and
deficiency judgments associated therewith; damages for emotional and
mental suffering; punitive and treble damages; and attorneys' fees. The
amount of the alleged damages is not specified in the complaints.
As was described in the Company's previous filings, MetaBank was the
lead lender and servicer of approximately $32.0 million in loans to
three auto dealership related companies and their owners. Approximately
$22.2 million of the total had been sold to ten participating financial
institutions. Each participation agreement with the ten participant
banks provides that the participant bank shall own a specified
percentage of the outstanding loan balance at any give time. Each
agreement also recites the maximum amount that can be loaned by
MetaBank on that particular loan. MetaBank allocated to some
participants an ownership in the outstanding loan balance in excess of
the percentage specified in the participation agreement. MetaBank
believes that in each instance this was done with the full knowledge
and consent of the participant. Several participants have demanded that
their participations be adjusted to match the percentage specified in
the participant agreement. Based on the total loan recoveries projected
as of March 31, 2006, MetaBank calculated that it would cost
approximately $953,000 to adjust these participations as the
participants would have them adjusted. A few participants have more
recently asserted that MetaBank owes them additional monies based on
additional legal theories. MetaBank denies any obligation to make the
requested adjustments on these or related claims. Other than as
disclosed below, MetaBank cannot predict at this time whether any of
these claims will be the subject of litigation.
During the three months ended June 30, 2006 or shortly thereafter four
lawsuits were filed against the Company's MetaBank subsidiary. Three of
the complaints are related to the Company's alleged actions in
connection with its activities as lead lender to three companies
involved in auto sales, service, and financing and their owner. The
fourth complaint alleges patent infringement. All four actions are in
their infancy and materiality cannot be determined at this time. The
Company intends, however, to vigorously defend its actions.
First Midwest Bank-Deerfield Branches and Mid-Country Bank v. MetaBank
(Civ. No. 06-2241). On June 28, 2006, First Midwest Bank-Deerfield
Branches and Mid-Country Bank filed suit against MetaBank in South
Dakota's Second Judicial Circuit Court, Minnehaha County, in the above
titled action. The complaint alleges that plaintiff banks, who were
participating lenders with MetaBank on a series of loans made to Dan
Nelson Automotive Group ("DNAG") and South Dakota Acceptance
Corporation
10
("SDAC"), suffered damages exceeding $1 million as a result of
MetaBank's placement and administration of the loans that were the
subject of the loan participation agreements. The complaint sounds in
breach of contract, negligence, gross negligence, negligent
misrepresentation, fraud in the inducement, unjust enrichment and
breach of fiduciary duty. On July 17, 2006, MetaBank removed the case
from state court to the United States District Court for the District
of South Dakota, where the action has been assigned case no. Civ.
06-4114. Plaintiffs have moved to remand the case back to state court.
That motion is pending.
First Premier Bank v. MetaBank (Civ. No. 06-2277). On July 5, 2006,
First Premier Bank filed suit against MetaBank in South Dakota's Second
Judicial Circuit Court, Minnehaha County in the above titled action.
The complaint alleges that First Premier, a participating lender with
MetaBank on a series of loans made to SDAC, has suffered damages in an
as yet undetermined amount as a result of MetaBank's actions in selling
to First Premier a participation in a loan made to SDAC and MetaBank's
actions in administering that loan. The complaint sounds in breach of
contract, breach of covenant of good faith and fair dealing, fraudulent
inducement, fraud, deceit, negligent misrepresentation, fraudulent
misrepresentation, conversion, negligence, gross negligence, breach of
fiduciary duty and unjust enrichment. On July 17, 2006, MetaBank
removed the case from state court to the United States District Court
for the District of South Dakota, where the action has been assigned
case no. Civ. 06-4115. Plaintiffs have moved to remand the case back to
state court. That motion is pending.
Home Federal Bank v. J. Tyler Haahr, Daniel A. Nelson and MetaBank
(Civ. No. 06-2230). On June 26, 2006, Home Federal Bank filed suit
against MetaBank and two individuals, J. Tyler Haahr and Daniel A.
Nelson, in South Dakota's Second Judicial Circuit Court, Minnehaha
County in the above titled action. The complaint alleges that Home
Federal, a participating lender with MetaBank on a series of loans made
to DNAG and SDAC, suffered damages exceeding $3.8 million as a result
of failure to make disclosures regarding an investigation of Nelson,
DNAG and SDAC by the Iowa Attorney General at the time Home Federal
agreed to an extension of the loan participation agreements. The
complaint sounds in fraud, negligent misrepresentation, breach of
fiduciary duty, conspiracy and breach of duty of good faith and fair
dealing. Discovery in that matter is proceeding.
Subject to a reservation of rights, the Company's insurance carrier has
agreed to cover the three claims described above.
Meridian Enterprises Corporation v. Bank of America Corporation et al.
(Case No. 4:06-cv-01117CDP). On July 21, 2006, Meridian Enterprises
Corporation ("Meridian") filed suit against Meta Financial Group, Inc.
(Meta Payment Systems division) ("Meta") and other banks and financial
institutions in the U.S. District Court for the Eastern District of
Missouri in the above-titled action. Meridian is the owner of U.S.
Patent No. 5,025,372 (the " '372 Patent"). The complaint alleges that
Meta and the co-defendants each sell, administer, process and/or
sponsor an incentive program where cards are provided to participants
in the incentive program that can be presented to retailers to make a
purchase. The complaint further alleges, inter alia, that Meta and the
co-defendants each use a computer to determine whether or not a
participant's performance under the incentive program entitles the
participant to an award, in which the computer also determines the
amount of the award, and the amount of the award is based upon the
level of the participant's performance in the incentive program.
Accordingly, the complaint sounds in infringement, inducement of
infringement, and contributory infringement of one or more claims of
the '372 Patent.
There are no other material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
5. STOCK OPTION PLAN
11
The Company maintains the 2002 Omnibus Incentive Plan, which, among
other things, provides for the awarding of stock options and nonvested
(restricted) shares to certain officers and directors of the Company.
Awards are granted by the Stock Option Committee of the Board of
Directors based on the performance of the award recipients, or other
relevant factors.
Effective October 1, 2005, the Company adopted SFAS No. 123(R),
Share-Based Payment, using a modified prospective application. Prior to
that date, the Company accounted for stock option awards under APB
Opinion No. 25, Accounting for Stock Issued to Employees. In accordance
with SFAS No. 123(R), compensation expense for share based awards is
recorded over the vesting period at the fair value of the award at the
time of grant. The recording of such compensation expense began on
October 1, 2005 for shares not yet vested as of that date and for all
new grants subsequent to that date. The exercise price of options or
fair value of nonvested shares granted under the Company's incentive
plans is equal to the fair market value of the underlying stock at the
grant date. The Company assumes no projected forfeitures on its stock
based compensation, since actual historical forfeiture rates on its
stock based incentive awards has been negligible.
On January 22, 2007, the Company's stockholders approved the First
Amendment to the 2002 Omnibus Incentive Plan (the "Plan"). A
description of the Plan was included in "Proposal II: Approval of
Amendment to 2002 Omnibus Incentive Plan" of the Company's Definitive
Proxy Statement for its 2007 Annual Meeting, as filed with the
Securities Exchange Commission on December 29, 2006, and is
incorporated herein by reference.
A summary of option activity at and for the three months ended December
31, 2006 is presented below:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
shares Price Term (Yrs) Value
---------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2006 386,425 $ 19.79 6.65 $ 1,792,717
Granted -- --
Exercised (12,150) 17.07 118,635
Forfeited or expired -- --
---------------------------------------------------------------------------------------------------
Options outstanding, December 31, 2006 374,275 $ 19.88 6.59 $ 3,713,130
Options exercisable at December 31, 2006 269,775 $ 18.85 5.79 $ 2,954,453
A summary of nonvested share activity at and for the three months ended
December 31, 2006 is presented below:
Weighted
Number Average
of Fair Mkt Val
shares At Grant
--------------------------------------------------------------------------------
Nonvested shares outstanding, September 30, 2006 8,333 $ 24.43
Granted -- --
Vested -- --
Forfeited or expired -- --
--------------------------------------------------------------------------------
Nonvested shares outstanding, December 31, 2006 8,333 $ 24.43
As of December 31, 2006, stock based compensation expense not yet
recognized in income totaled $541,000, which is expected to be
recognized over a weighted average remaining period of 1.38 years.
6. SEGMENT INFORMATION
An operating segment is generally defined as a component of a business
for which discrete financial information is available and whose results
are reviewed by the chief operating decision-maker. Operating segments
are aggregated into reportable segments if certain criteria are met.
The Company has determined that it has two reportable segments under
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information: a Traditional
Banking Segment consisting of its two banking subsidiaries, MetaBank
and MetaBank West Central, and Meta Payment Systems(R), a division of
MetaBank. MetaBank and MetaBank West Central operate as traditional
community banks providing deposit, loan and other related products to
individuals and small businesses, primarily in the communities where
their offices are located. Meta Payment Systems provides a number of
products and services, primarily to third parties, including financial
institutions and other businesses. These products and services include
issuance of prepaid cards, issuance of credit cards, sponsorship of
ATMs into the debit networks, ACH origination services and a gift card
program. Other related programs are in the process of development. The
remaining grouping under the caption All Other Segments consists of the
operations of Meta Financial Group, Inc. and Meta Trust Company.
Revenues and expenses are allocated to business segments using a funds
transfer pricing methodology through
12
which excess funds or funding shortfalls at individual segments are
sold to or bought from, respectively, the remaining segments. As the
Company's funding mix changes between segments, net interest income at
individual segments may rise or fall based on the relative size of the
excess funding or funding shortfall position at any particular segment.
The following tables present segment data for the Company for the
three-month periods ended December 31, 2006 and 2005, respectively.
Traditional Meta Payment
Banking Systems All Others Total
----------------------------------- ------------ ------------ ------------- -------------
Three Months Ended December 31, 2006
Net interest income (expense) $ 4,105 $ 1,387 $ (233) $ 5,259
Provision for loan losses 5,465 -- -- 5,465
Non-interest income 474 3,462 25 3,961
Non-interest expense 4,499 3,951 380 8,830
------------ ------------ ------------ ------------
Net income (loss) before tax (5,385) 898 (588) (5,075)
Income tax expense (benefit) (1,922) 292 (191) (1,821)
------------ ------------ ------------ ------------
Net income (loss) $ (3,463) $ 606 $ (397) $ (3,254)
============ ============ ============ ============
Inter-segment revenue (expense) $ (1,367) $ 1,367 $ -- $ --
Total assets 511,334 238,914 4,263 754,511
Total deposits 365,629 234,026 -- 599,655
Three Months Ended December 31, 2005
Net interest income (expense) $ 4,125 $ 757 $ (162) $ 4,720
Provision for loan losses 40 -- -- 40
Non-interest income 581 1,238 26 1,845
Non-interest expense 4,287 1,241 263 5,791
------------ ------------ ------------ ------------
Net income (loss) before tax 379 754 (399) 734
Income tax expense (benefit) 132 260 (173) 219
------------ ------------ ------------ ------------
Net income (loss) $ 247 $ 494 $ (226) $ 515
============ ============ ============ ============
Inter-segment revenue (expense) $ (324) $ 486 $ (162) $ --
Total assets 650,520 103,602 1,162 755,284
Total deposits 446,208 104,290 -- 550,498
7. SUBSEQUENT EVENT
On January 31, 2007, MetaBank announced that it had entered into
agreements to sell four of its Northwest Iowa branches. Iowa State Bank
in Sac City, Iowa, will purchase the MetaBank offices in Sac City, Lake
View, and Odebolt, Iowa. This transaction is anticipated to close on
March 31, 2007. Additionally, Iowa Trust & Savings Bank in Emmetsburg,
Iowa will purchase the MetaBank office in Laurens, Iowa. This
transaction is anticipated to close on April 13, 2007. Both of the
transactions are subject to regulatory approval.
Together, the transactions will involve the assumption by the acquiring
banks of approximately $40.4 million in deposits and the purchase of
$1.2 million in loans. Meta Financial Group expects the transaction
will generate a pre-tax gain on sale of approximately $3.4 million.
13
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
GENERAL
Meta Financial Group, Inc. is a bank holding company whose primary subsidiaries
are MetaBank and MetaBank West Central. The Company was incorporated in 1993 as
a unitary non-diversified savings and loan holding company that, on September 20
of that year, acquired all of the capital stock of MetaBank, a federal savings
bank, in connection with MetaBank's conversion from mutual to stock form of
ownership. On September 30, 1996, the Company became a bank holding company in
conjunction with the acquisition of MetaBank WC, a state-chartered commercial
bank.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at December 31, 2006, compared to September 30,
2006, and the consolidated results of operations for the three-month periods
ended December 31, 2006 and 2005. This discussion should be read in conjunction
with the Company's consolidated financial statements, and notes thereto, for the
year ended September 30, 2006.
CORPORATE DEVELOPMENTS AND OVERVIEW
The Company continues to emphasize expansion in the growing metropolitan areas
of Sioux Falls, South Dakota and Des Moines, Iowa. The Company focuses primarily
on establishing lending and deposit relationships with commercial businesses and
commercial real estate developments in these communities. In March 2007, the
Company also plans to open an administrative support office in Omaha, Nebraska,
which may eventually lead to commercial lending production in that area. On
January 31, 2007, the Company announced a plan to divest four of its branches in
rural Northwest Iowa. See "Subsequent Event" below.
The Company also continues to experience significant growth in its Meta Payments
Systems (MPS) division and is investing for further growth in this business
unit. MPS offers prepaid debit cards and other payment systems products and
services through a global distribution network. As a part of its normal course
of business, the division also attracts significant balances on low- and no-cost
demand deposits. Further discussion of the financial results of MPS is included
below.
For the three months ended December 31, 2006, the Company announced impairments
on two commercial lending relationships which together reduced pre-tax earnings
by $5.74 million. Further detail on these loans is included in "Financial
Condition" and "Results of Operations" below.
The Company's stock trades on the NASDAQ Global Market under the symbol "CASH."
SUBSEQUENT EVENT
On January 31, 2007, MetaBank announced that it had entered into agreements to
sell four of its Northwest Iowa branches. Iowa State Bank in Sac City, Iowa,
will purchase the MetaBank offices in Sac City, Lake View, and Odebolt, Iowa.
This transaction is anticipated to close on March 31, 2007. Additionally, Iowa
Trust & Savings Bank in Emmetsburg, Iowa will purchase the MetaBank office in
Laurens, Iowa. This transaction is anticipated to close on April 13, 2007. Both
of the transactions are subject to regulatory approval.
Together, the transactions will involve the assumption by the acquiring banks of
approximately $40.4 million in deposits and the purchase of $1.2 million in
loans. Meta Financial Group expects the transaction will generate a pre-tax gain
on sale of approximately $3.4 million.
14
FINANCIAL CONDITION
As of December 31, 2006, the Company had assets totaling $754.5 million,
compared to $741.6 million at September 30, 2006. The increase in assets of
$12.9 million resulted primarily from an increase in cash and cash equivalents
of $41.9 million. In general, the Company maintains its cash investments in
interest-bearing overnight deposits with various correspondent banks. Federal
funds sold deposits are maintained at various large commercial banks.
Offsetting the growth in cash were decreases in the Company's investment
securities and loan portfolios. Investment securities, including mortgage-backed
securities, declined $11.2 million from $192.1 million at September 30, 2006 to
$180.9 million at December 31, 2006. The Company did not purchase any securities
during the three months ended December 31, 2006. The Company's loan portfolio,
net of allowance for loan losses, also decreased $18.9 million from $389.3
million at September 30, 2006 to $370.3 million at December 31, 2006. The
Company continues to experience runoff in its commercial loan participation and
commercial real estate portfolios. Management attributes this shrinkage to an
overall decrease in the demand for credit and increased competition from the
secondary market.
Total deposits rose $33.9 million from $565.7 million at September 30, 2006 to
$599.6 million at December 31, 2006. Most of this increase was the result of an
increase in non-interest-bearing checking deposits of $73.4 million arising from
a seasonal spike in deposits associated with holiday gift card sales. Offsetting
this growth was a decrease in higher costing money market, savings, and public
funds deposits of $42.7 million. Other deposit portfolios exhibited moderate
growth during this time period.
Total wholesale borrowings also declined $18.6 million from $125.0 million at
September 30, 2006 to $106.4 million at December 31, 2006. The Company continues
to de-emphasize these high cost funding sources in an effort to decrease overall
liability costs and to de-lever the Company's balance sheet.
At December 31, 2006, the Company's shareholders' equity totaled $43.6 million,
down $1.7 million from $45.3 million at September 30, 2006. The decrease was
primarily the result of the reported loss for the quarter (see "Results of
Operations" below) and the payment of dividends on common stock, offset by a
favorable change in the accumulated other comprehensive loss on the Company's
available for sale securities portfolio. At December 31, 2006, the Company and
both of its banking subsidiaries, MetaBank and MetaBank West Central, continue
to meet regulatory requirements for classification as well-capitalized
institutions.
Non-Performing Assets and Allowance for Loan Losses
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At December 31, 2006, the Company had loans delinquent 30- days and over
totaling $13.0 million, or 3.53% of total loans, compared to $5.5 million, or
1.39% of total loans, at September 30, 2006. The increase in delinquent loans
since September is primarily the result of a delinquency on a $5.1 commercial
loan relationship. The Company participates with over 20 other financial
institutions in this loan and is not the lead lender or servicer. The loan is
purportedly secured by stock in a charter airline company, the residence of the
principal borrower, and an airplane. Questions have arisen concerning the extent
and quality of the collateral, which the banks are investigating. As of December
31, 2006, the Company had classified these loans as doubtful and had established
a corresponding allowance for loss of approximately 97% of the current loan
balance.
At December 31, 2006, commercial and multi-family real estate loans delinquent
30 days and over totaled $6.0 million, or 1.64% of total loans. There were no
delinquent loans in this category as of September 30, 2006.
15
Multi-family and commercial real estate loans generally present a higher level
of risk than loans secured by one-to-four family residences. This greater risk
is due to several factors, including, but not limited to, the concentration of
principal in a limited number of loans and borrowers, the effect of general
economic conditions on income producing properties and the higher level of
difficulty of evaluating and monitoring these types of loans. The Company
believes that the level of allowance for loan losses adequately reflects
potential risks related to these loans; however there can be no assurance that
all loans will be fully collectible.
At December 31, 2006, commercial business loans delinquent 30 days and over
totaled $5.8 million, or 1.57% of total loans. This compares to $5.1 million, or
1.28% of total loans, at September 30, 2006. Commercial business lending
involves a greater degree of risk than one-to-four family residential mortgage
loans because of the typically larger loan amounts. In addition, payments on
loans are typically dependent on the cash flows derived from the operation or
management of the business to which the loan is made. The success of the loan
may also be affected by factors outside the control of the business, such as
unforeseen changes in economic conditions for the business, the industry in
which the business operates or the general environment. The Company believes
that the level of allowance for loan losses adequately reflects potential risks
related to these loans; however there can be no assurance that all loans will be
fully collectible.
At December 31, 2006, agricultural loans delinquent 30 days and over totaled
$427,000, or 0.12% of total loans. This compares to $201,000, or 0.05% of total
loans, at September 30, 2006. Agricultural lending also involves a greater
degree of risk than one-to-four family residential mortgage loans because of the
typically larger loan amounts. In addition, payments on loans are dependent on
the successful operation or management of the farm property securing the loan or
for which an operating loan is utilized. The success of the loan may also be
affected by factors outside the control of the agricultural borrower, such as
the weather and grain and livestock prices.
The table below sets forth the amounts and categories of the Company's
non-performing assets. Foreclosed assets include assets acquired in settlement
of loans.
December 31, 2006 September 30, 2006
----------------- ------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family $ -- $ 31
Commercial and multi-family 3,206 --
Agricultural real estate -- --
Consumer 19 --
Agricultural operating 180 182
Commercial business 5,593 3,887
------------ ------------
Total non-accruing loans 8,998 4,100
Accruing loans delinquent 90 days or more -- --
------------ ------------
Total non-performing loans 8,998 4,100
Foreclosed assets:
One-to four family -- 15
Commercial and multi-family 35 35
Consumer -- --
Agricultural operating -- --
Commercial business -- --
------------ ------------
Total foreclosed assets 35 50
------------ ------------
Total non-performing assets $ 9,033 $ 4,150
============ ============
Total as a percentage of total assets 1.20% 0.55%
============ ============
Classified assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general
16
allowances for loan losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem loans. When assets are
classified as loss, the Company is required either to establish a specific
allowance for loan losses equal to 100% of that portion of the loan so
classified, or to charge-off such amount. The Company's determination as to the
classification of its loans and the amount of its allowances for loan losses are
subject to review by its regulatory authorities, which may require the
establishment of additional general or specific allowances for loan losses. The
discovery of additional information in the future may also affect both the level
of classification and the amount of allowances for loan losses.
On the basis of management's review of its loans and other assets, at December
31, 2006, the Company had classified a total of $4.3 million of its assets as
substandard, $5.3 million as doubtful and none as loss. This compares to
classifications at September 30, 2006 of $5.0 million substandard, $447,000
doubtful and none as loss.
Allowance for loan losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a number of factors including, among
others, historic loss experience, the overall level of classified assets and
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Company and its borrowers operate.
At December 31, 2006, the Company has established an allowance for loan losses
totaling $10.3 million, or 115% of non-performing loans, compared to $6.0
million, or 143% of non-performing loans at September 30, 2006.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the three month periods ended December 31, 2006
and 2005.
Three Months Ended
December 31,
------------
(Dollars in thousands) 2006 2005
---------------------- ---- ----
Beginning balance $ 5,968 $ 7,222
Provision charged to operations 5,465 41
Loans charged-off (1,093) (8)
Recoveries 9 2
------------ ------------
Ending balance $ 10,349 $ 7,257
============ ============
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information. In
addition to the factors mentioned above, future additions to the allowance for
loan losses may become necessary based upon changing economic conditions,
increased loan balances or changes in the underlying collateral of the loan
portfolio.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policies to be those related to the allowance for loan
losses and asset impairment judgments including the recoverability of goodwill.
17
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative, in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in non-performing
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and,
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies, and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio it will enhance its methodology accordingly. Management
may have reported a materially different amount for the provision for loan
losses in the statement of operations to change the allowance for loan losses if
its assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Non-performing Assets and
Allowance for Loan Losses." Although management believes the level of the
allowance as of December 31, 2006 was adequate to absorb probable losses
inherent in the loan portfolio, a decline in local economic conditions, or other
factors, could result in increasing losses.
Goodwill represents the excess of acquisition costs over the fair value of the
net assets acquired in a purchase acquisition. Goodwill is tested annually for
impairment.
RESULTS OF OPERATIONS
General. For the three months ended December 31, 2006, the Company recorded a
net loss of $3.25 million, or $1.30 per diluted share, compared to net income of
$515,000, or $0.21 per diluted share, for the same period in 2006. Earnings in
the current period were impacted by the recognition of impairments on two
commercial loan relationships, which together reduced pre-tax earnings by $5.74
million. Additionally, the Company incurred higher operating expenses.
Offsetting these factors, in part, were increased income from card fees and
higher net interest income.
Net interest income. Net interest income for the first quarter of fiscal year
2007 was $5.26 million, up 11 percent from $4.72 million in the first quarter of
fiscal year 2006. Both higher asset yields and lower liability costs contributed
to this increase. Net interest margin rose 41 basis points from 2.66% in the
first quarter of fiscal year 2006 to 3.07% in the current quarter. The rise in
short term interest rates during the past year contributed to both higher loan
and investment yields. Total asset yields for the first quarter of fiscal year
2007 were 6.00%, up 32 basis points from 5.68% for the same quarter last year. A
significant change in deposit mix, away from higher costing certificates and
public funds deposits and toward low- and no-cost demand deposits also
contributed to a meaningful decline in liability costs despite a higher interest
rate environment. Total liability costs fell 8 basis points from 3.03% in the
first quarter of fiscal year 2006 to 2.95% in the current quarter.
The following table presents the Company's average interest earning assets,
interest bearing liabilities, net interest spread, and net interest margin for
the three-month periods ended December 31, 2006 and 2005.
18
Three Months Ended December 31, 2006 2005
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 381,174 $ 6,876 7.19% $ 432,129 $ 7,586 7.00%
Mortgage-backed securities 155,148 1,606 4.14% 201,484 1,833 3.64%
Other investments and fed funds sold 152,812 1,895 4.93% 80,449 757 3.74%
------------------------------------- -------------------------------------
Total interest-earning assets 689,134 $ 10,377 6.00% 714,062 $ 10,176 5.68%
====================== ======================
Non-interest-earning assets 47,509 43,920
---------- ----------
Total assets $ 736,644 $ 757,982
========== ==========
Non-interest bearing deposits $ 206,251 $ -- 0.00% $ 108,839 $ -- 0.00%
Interest-bearing liabilities:
Interest-bearing checking 27,619 247 3.55% 26,430 203 3.04%
Savings 26,699 189 2.80% 59,888 424 2.81%
Money markets 87,448 703 3.19% 84,975 472 2.21%
Time deposits 216,647 2,364 4.33% 254,262 2,248 3.51%
FHLB advances 95,915 1,238 5.05% 152,884 1,792 4.59%
Other borrowings 24,937 377 6.00% 24,983 317 5.04%
------------------------------------- -------------------------------------
Total interest-bearing liabilities 479,264 5,118 4.22% 603,422 5,456 3.58%
Total deposits and
interest-bearing liabilities 685,516 $ 5,118 2.95% 712,261 $ 5,456 3.03%
====================== ======================
Other non-interest bearing liabilities 5,445 2,658
---------- ----------
Total liabilities 690,960 714,919
Shareholders' equity 45,684 43,063
---------- ----------
Total liabilities and
shareholders' equity $ 736,644 $ 757,982
========== ==========
Net interest income and net
interest rate spread including
non-interest bearing deposits $ 5,259 3.05% $ 4,720 2.65%
====================== ======================
Net interest margin 3.07% 2.66%
========== ==========
19
Provision for loan loss. The Company recorded a provision for loan losses in the
first quarter of fiscal year 2007 of $5.46 million. This provision is directly
related to two commercial loan relationships which the Company has determined to
be impaired. First, a $690,000 provision was recorded on a loan secured by the
assets of a road paving company. Second, the Company recognized a $4.95 million
provision on the aforementioned purchased participation loan relationship. See
"Non-Performing Assets and Allowance for Loan Losses" herein. Offsetting these
specific provisions, the Company also recorded a $180,000 negative provision
during the quarter as a result of shrinkage in the loan portfolio.
Non-interest income. Non interest income for the first quarter was $3.96
million, more than double the level from the same quarter a year ago. The
increase is the result of higher fee income generated by the Meta Payment
Systems division. Fees earned on prepaid debit cards and other payment systems
products and services were $3.41 million for the first quarter of fiscal year
2007, compared to $1.22 million for the same quarter in fiscal year 2006.
Non-interest expense. The Company's non interest expense was $8.83 million for
the first quarter of fiscal year 2007, reflecting a $3.04 million increase from
$5.79 million in the same quarter in fiscal year 2006. The increase is broad
based and is generally the result of the Company's investment in the Meta
Payment Systems division.
Card processing expenses rose $1.32 million from $333,000 in the first quarter
of fiscal year 2006 to $1.65 million in the current quarter. These expenses
reflect costs associated with processing and delivering debit card related
products and services. Compensation expense rose just under $1 million on a
quarter over quarter basis to $4.03 million. This increase reflects the staffing
of two new full service branches, one each in Sioux Falls, SD and West Des
Moines, IA, an increase in the sales force and operations support staff at Meta
Payment Systems, and the addition of IT staff and other administrative support
within the Company. Many of the new employees at MPS and in IT will be focused
on developing new product lines and increasing market penetration of our
payments systems products and services. Other expenses at the Company have also
exhibited growth as business volumes have increased. Increases in occupancy and
equipment expense reflect the aforementioned new branches and the addition of
administrative office space in Sioux Falls. Similarly, increases in marketing,
legal and consulting, and other expenses reflect the Company's continuing
efforts to support growth of business opportunities that management believes
will be profitable over time.
Income tax expense. For the first quarter of fiscal year 2007, the Company
recorded an income tax benefit of $1.82 million. The benefit compares to a
$219,000 income tax expense for the first quarter of fiscal year 2006. The
change is due primarily to the change in net income (loss) before income tax
expense (benefit).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments, and mortgage-backed securities, and
funds provided by other operating activities. While scheduled payments on loans,
mortgage-backed securities, and short-term investments are relatively
predictable sources of funds, deposit flows and early loan repayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At December 31, 2006, the Company had
commitments to originate and purchase loans totaling $50.3 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
Regulations require MetaBank and MetaBank WC to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth MetaBank's and MetaBank WC's actual capital and
required capital amounts and ratios at December 31, 2006 which, at that date,
exceeded the minimum capital adequacy requirements.
20
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
At December 31, 2006 Amount Ratio Amount Ratio Amount Ratio
-------------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
MetaBank
--------
Tangible capital (to tangible assets) $44,977 6.36% $10,610 1.50% n/a n/a
Tier 1 (core) capital (to adjusted total assets) 44,977 6.36 28,292 4.00 $35,366 5.00%
Tier 1 (core) capital (to risk weighted assets) 44,977 10.00 17,984 4.00 26,976 6.00
Total risk based capital (to risk weighted assets) 50,757 11.29 35,968 8.00 44,960 10.00
MetaBank West Central
---------------------
Tier 1 capital (to average assets) 3,662 8.74 1,676 4.00 2,095 5.00
Tier 1 risk based capital (to risk weighted assets) 3,662 14.88 984 4.00 1,476 6.00
Total risk based capital (to risk weighted assets) 3,975 16.16 1,968 8.00 2,460 10.00
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At December 31, 2006, the Company, MetaBank, and
MetaBank WC exceeded minimum requirements for the well-capitalized category.
FORWARD LOOKING STATEMENTS
The Company, and its wholly-owned subsidiaries, MetaBank and MetaBank WC, may
from time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission,
in its reports to shareholders, and in other communications by the Company,
which are made in good faith by the Company pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions that are subject to
significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond the Company's control. Such statements may
address: future operating results; customer growth and retention; loan and other
product demand; earnings growth and expectations; new products and services,
such as those offered by the Meta Payment Systems division; credit quality and
adequacy of reserves; technology; and our employees. The following factors,
among others, could cause the Company's financial performance to differ
materially from the expectations, estimates, and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary, and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
inflation, interest rate, market, and monetary fluctuations; the timely
development of and acceptance of new products and services of the Company and
the perceived overall value of these products and services by users; the impact
of changes in financial services' laws and regulations; technological changes;
acquisitions; litigation; changes in consumer spending and saving habits; and
the success of the Company at managing and collecting assets of borrowers in
default and managing the risks involved in the foregoing.
The foregoing list of factors is not exclusive. Additional discussions of
factors affecting the Company's business and prospects are contained in the
Company's periodic filings with the SEC. The Company expressly disclaims any
intent or obligation to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company.
21
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company originates predominantly adjustable rate loans and fixed rate loans
with relatively short terms to maturity. Long term fixed rate residential
mortgages are generally sold into the secondary market. As a result of its
lending practices, the Company's loan portfolio is relatively short in duration
and yields respond quickly to the overall level of interest rates.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet the Company's cash demands. This portfolio may also
be used in the ongoing management of interest rate risk. As a result, funds may
be invested among various categories of security types and maturities based upon
the Company's need for liquidity and its desire to create an economic hedge
against the effects changes in interest rates may have on the overall market
value of the Company.
The Company offers a full range of deposit products which are generally short
term in nature. Interest-bearing checking, savings, and money market accounts
generally provide a stable source of funds for the bank and also respond
relatively quickly to changes in short term interest rates. The Company offers
certificates of deposit with maturities of three months through five years,
which serve to extend the duration of the overall deposit portfolio. A
significant portion of the Company's deposit portfolio is concentrated in
non-interest-bearing checking accounts. These accounts serve to decrease the
Company's overall cost of funds and reduce its sensitivity to changes in short
term interest rates.
The Company also maintains a portfolio of wholesale borrowings, predominantly
advances from the Federal Home Loan Bank which carry fixed terms and fixed rates
of interest. The Company utilizes this portfolio to manage liquidity demands and
also, when appropriate, in the ongoing management of interest rate risk.
The Board of Directors, as well as the Office of Thrift Supervision, have
established limits on the level of acceptable interest rate risk. There can be
no assurance, however, that, in the event of an adverse change in interest
rates, the Company's efforts to limit interest rate risk will be successful.
Net Portfolio Value. The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. The Company's Investment Committee, which
consists of members of senior management, is responsible for managing the
interest rate risk of the Company.
Presented below, as of December 31, 2006 and September 30, 2006, is an analysis
of the Company's interest rate risk profile as measured by changes in NPV for an
instantaneous and sustained parallel shift in the yield curve, in 100 basis
point increments, up and down 200 basis points. Growth in the Company's
non-interest bearing checking portfolio has contributed to a shift in the
Company's interest rate risk profile. At December 31, 2006, the Company was more
exposed to a decline in market value from a falling interest rate environment
than it was at September 30, 2006. Similarly, at December 31, 2006, the Company
was more exposed to an increase in market value from a rising interest rate
environment than it was at September 30, 2006. At both December 31, 2006 and
September 30, 2006, the Company's interest rate risk profile was within the
limits set by the Board of Directors. Additionally, MetaBank's interest rate
risk profile was within the limits set forth by the Office of Thrift
Supervision.
22
Change in Interest Rates Board Limit At December 31, 2006 At September 30, 2006
-------------------- ---------------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in thousands)
+200 bp (40)% $2,648 4% $ 548 1%
+100 bp (25) 1,510 2 562 1
0 bp (Base Case) -- -- -- -- --
-100 bp (25) (2,587) (3) (907) (1)
-200 bp (40) (7,642) (10) (4,139) (6)
Certain shortcomings are inherent in the method of analysis presented in the
preceding table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate mortgage-loans have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
23
Part I. Financial Information
Item 4. Controls and Procedures
CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures, as such term is defined in
Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2006 our disclosure controls and
procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in this Report was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (ii) information required to be disclosed by us in
our reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
With the participation of the Company's management, including its Chief
Executive Officer and Chief Financial Officer, the Company also conducted an
evaluation of the Company's internal control over financial reporting to
determine wither any changes occurred during the Company's fiscal quarter ended
December 31, 2006, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on such evaluation, management concluded that, as of the end of the period
covered by this report, there have not been any changes in the Company's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
24
META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings - On June 11, 2004, the Sioux Falls School
------------------
District filed suit in the Second Judicial Circuit Court alleging
that MetaBank, a wholly-owned subsidiary of the Company,
improperly allowed funds, which belonged to the school district,
to be deposited into, and subsequently withdrawn from, a corporate
account established by an employee of the school district. The
school district is seeking in excess of $600,000. MetaBank has
submitted the claim to its insurance carrier, and is working with
counsel to vigorously contest the suit.
On or about March 10, 2006, plaintiffs filed five class-action
suits on behalf of themselves and all other purchasers of vehicles
from Prairie Auto Group, Inc., Dan Nelson Automotive Group, Inc.'s
Rapid City, South Dakota location, and other not-yet-identified
auto sales entities owned or operated by defendants. The
complaints are styled as follows: Ronald Archulleta, et al. v.
Prairie Auto Group, Inc., et al. - In the Tribal Court for the
Oglala Sioux Tribe, Pine Ridge Indian Reservation; Cedar Around
Him, et al. v. Prairie Auto Group, Inc., et al. - In the Tribal
Court for the Rosebud Sioux Tribe, Rosebud Indian Reservation;
Chris Dengler, et al. v. Prairie Auto Group, Inc. - Circuit Court
of the Second Judicial Circuit, Minnehaha County, South Dakota;
Lucinda Janis, et al. v. Prairie Auto Group, Inc., et al. - File
No. C-157-04; In the Tribal Court for the Cheyenne River Sioux
Indian Reservation, Eagle Butte, South Dakota; and Kali Treetop,
et al. v. Prairie Auto Group, Inc., et al. - File No. 01-970;
Circuit Court for the Seventh Judicial Circuit, Pennington County,
South Dakota. Except for the named plaintiffs, each of the
complaints is essentially identical to the others. The nature of
the allegations are the same, and the same fourteen legal claims
are sought to be pled in each.
Each complaint states that it is a "companion" to the other four
and names the same defendants (approximately twenty-five)
including the Registrant and affiliates thereof (the "MetaBank
Defendants"). None of these complaints has yet been served on any
of the MetaBank Defendants. The thrust of the complaints is that
plaintiffs allegedly suffered damages as a result of a scheme by
defendants to use fraudulent statements, misrepresentations and
omissions to sell vehicles and extended warranties to plaintiffs.
Plaintiffs claim that they and other similarly situated purchasers
paid too much for their vehicles and were induced to buy
warranties that were not honored and otherwise proved worthless.
Plaintiffs allege that defendants reaped considerable profits
through fraudulent sales methods; by refusing to make warrantied
repairs; and by engaging in usurious repossession and resale
practices. Plaintiffs allege that these practices were part of a
business plan that originated with the franchisor-defendants and
was purchased and employed by the franchisee-defendants. It
appears that the principal basis for naming the MetaBank
Defendants is that they loaned money to finance some of the
defendants' business operations, purportedly with some degree of
knowledge about the defendants' allegedly abusive consumer
practices.
The complaints allege that the described transactions are typical
of defendants' business and were part of a deliberate scheme
directed primarily at Native American customers. The complaints
allege that the franchisee-defendants engaged in coercive,
fraudulent and other illegal activities in connection with the
automobile sales, and each seeks to state claims for: (1) breach
of express warranty; (2) breach of implied warranty of
merchantability; (3) deceit/fraud; (4) violation of applicable
deceptive trade laws; (5) breach of the implied covenant of good
faith and fair dealing; (6) conversion; (7) civil conspiracy under
tribal and state common law; (8) negligent hiring, training and
supervision of employees; (9) violation of the Federal Equal
Credit Opportunity Act; (10) invasion of privacy; (11) violation
of the Racketeer Influenced and Corrupt Organizations Act (RICO);
(12)
25
violation of the Magnuson-Moss Act; (13) violation of the Federal
Truth and Lending Act's (TILA) Three Day Rescission Period; and
(14) violation of TILA's Disclosure of Finance Cost Requirement.
In addition to seeking certification as a class, plaintiffs seek
cancellation of the automobile purchase contracts; monetary
damages including the initial purchase price warranty charges,
finance costs and related repossession and other charges; costs of
allegedly warrantied repairs that were not made by defendants;
consequential damages relating to the alleged wrongful
repossession of vehicles and deficiency judgments associated
therewith; damages for emotional and mental suffering; punitive
and treble damages; and attorneys' fees. The amount of the alleged
damages is not specified in the complaints.
As was described in the Company's previous filings, MetaBank was
the lead lender and servicer of approximately $32.0 million in
loans to three auto dealership related companies and their owners.
Approximately $22.2 million of the total had been sold to ten
participating financial institutions. Each participation agreement
with the ten participant banks provides that the participant bank
shall own a specified percentage of the outstanding loan balance
at any give time. Each agreement also recites the maximum amount
that can be loaned by MetaBank on that particular loan. MetaBank
allocated to some participants an ownership in the outstanding
loan balance in excess of the percentage specified in the
participation agreement. MetaBank believes that in each instance
this was done with the full knowledge and consent of the
participant. Several participants have demanded that their
participations be adjusted to match the percentage specified in
the participant agreement. Based on the total loan recoveries
projected as of March 31, 2006, MetaBank calculated that it would
cost approximately $953,000 to adjust these participations as the
participants would have them adjusted. A few participants have
more recently asserted that MetaBank owes them additional monies
based on additional legal theories. MetaBank denies any obligation
to make the requested adjustments on these or related claims.
Other than as disclosed below, MetaBank cannot predict at this
time whether any of these claims will be the subject of
litigation.
During the three months ended June 30, 2006 or shortly thereafter
four lawsuits were filed against the Company's MetaBank
subsidiary. Three of the complaints are related to the Company's
alleged actions in connection with its activities as lead lender
to three companies involved in auto sales, service, and financing
and their owner. The fourth complaint alleges patent infringement.
All four actions are in their infancy and materiality cannot be
determined at this time. The Company intends, however, to
vigorously defend its actions.
First Midwest Bank-Deerfield Branches and Mid-Country Bank v.
MetaBank (Civ. No. 06-2241). On June 28, 2006, First Midwest
Bank-Deerfield Branches and Mid-Country Bank filed suit against
MetaBank in South Dakota's Second Judicial Circuit Court,
Minnehaha County, in the above titled action. The complaint
alleges that plaintiff banks, who were participating lenders with
MetaBank on a series of loans made to Dan Nelson Automotive Group
("DNAG") and South Dakota Acceptance Corporation ("SDAC"),
suffered damages exceeding $1 million as a result of MetaBank's
placement and administration of the loans that were the subject of
the loan participation agreements. The complaint sounds in breach
of contract, negligence, gross negligence, negligent
misrepresentation, fraud in the inducement, unjust enrichment and
breach of fiduciary duty. On July 17, 2006, MetaBank removed the
case from state court to the United States District Court for the
District of South Dakota, where the action has been assigned case
no. Civ. 06-4114. Plaintiffs have moved to remand the case back to
state court. That motion is pending.
First Premier Bank v. MetaBank (Civ. No. 06-2277). On July 5,
2006, First Premier Bank filed suit against MetaBank in South
Dakota's Second Judicial Circuit Court, Minnehaha County in the
above titled action. The complaint alleges that First Premier, a
participating lender with MetaBank on
26
a series of loans made to SDAC, has suffered damages in an as yet
undetermined amount as a result of MetaBank's actions in selling
to First Premier a participation in a loan made to SDAC and
MetaBank's actions in administering that loan. The complaint
sounds in breach of contract, breach of covenant of good faith and
fair dealing, fraudulent inducement, fraud, deceit, negligent
misrepresentation, fraudulent misrepresentation, conversion,
negligence, gross negligence, breach of fiduciary duty and unjust
enrichment. On July 17, 2006, MetaBank removed the case from state
court to the United States District Court for the District of
South Dakota, where the action has been assigned case no. Civ.
06-4115. Plaintiffs have moved to remand the case back to state
court. That motion is pending.
Home Federal Bank v. J. Tyler Haahr, Daniel A. Nelson and MetaBank
(Civ. No. 06-2230). On June 26, 2006, Home Federal Bank filed suit
against MetaBank and two individuals, J. Tyler Haahr and Daniel A.
Nelson, in South Dakota's Second Judicial Circuit Court, Minnehaha
County in the above titled action. The complaint alleges that Home
Federal, a participating lender with MetaBank on a series of loans
made to DNAG and SDAC, suffered damages exceeding $3.8 million as
a result of failure to make disclosures regarding an investigation
of Nelson, DNAG and SDAC by the Iowa Attorney General at the time
Home Federal agreed to an extension of the loan participation
agreements. The complaint sounds in fraud, negligent
misrepresentation, breach of fiduciary duty, conspiracy and breach
of duty of good faith and fair dealing. Discovery in that matter
is proceeding.
Subject to a reservation of rights, the Company's insurance
carrier has agreed to cover the three claims described above.
Meridian Enterprises Corporation v. Bank of America Corporation et
al. (Case No. 4:06-cv-01117CDP). On July 21, 2006, Meridian
Enterprises Corporation ("Meridian") filed suit against Meta
Financial Group, Inc. (Meta Payment Systems division) ("Meta") and
other banks and financial institutions in the U.S. District Court
for the Eastern District of Missouri in the above-titled action.
Meridian is the owner of U.S. Patent No. 5,025,372 (the " '372
Patent"). The complaint alleges that Meta and the co-defendants
each sell, administer, process and/or sponsor an incentive program
where cards are provided to participants in the incentive program
that can be presented to retailers to make a purchase. The
complaint further alleges, inter alia, that Meta and the
co-defendants each use a computer to determine whether or not a
participant's performance under the incentive program entitles the
participant to an award, in which the computer also determines the
amount of the award, and the amount of the award is based upon the
level of the participant's performance in the incentive program.
Accordingly, the complaint sounds in infringement, inducement of
infringement, and contributory infringement of one or more claims
of the '372 Patent.
There are no other material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 1.A. Risk Factors - Other than the risk factors described below, there
------------
have been no material changes from those described in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for
the period ended September 30, 2006.
On March 15, 2006, the Federal Housing Finance Board ("Finance
Board"), the federal regulator of the 12 Federal Home Loan Banks
("FHLBs"), published for comment a proposal that would (i)
establish a minimum retained earnings requirement for each Federal
Home Loan Bank, (ii) limit the amount of excess stock that a Bank
could have outstanding, and (iii) impose new restrictions on the
timing and form of dividend payment. On December 22, 2006, the
Finance Board adopted a final rule prohibiting the FHLBs from
issuing new excess stock to members (such as MetaBank and MetaBank
West Central) if the amount of member excess stock exceeds one
percent of the FHLB's
27
assets. The feature of the proposed rule that would have required
the FHLBs to establish a retained earnings minimum was not
retained. It is not anticipated that the final regulation will
have a material impact on the Company.
In connection with the previously disclosed bankruptcy of certain
borrowers of MetaBank, MetaBank has experienced loan losses, which
have, in part, been passed on to various entities that
participated with MetaBank, which was the lead lender at the time
the loans were made. Several of the participant banks have
contended, over and above the allocation issue raised by the
participants and described in previous filings of the Registrant,
that MetaBank owes such participants additional monies, and have
threatened MetaBank with legal action, or have already filed such
legal action, to recover said monies. In addition, five lawsuits,
all containing virtually identical allegations to each of the
others, have been filed naming several defendants, including
MetaBank and affiliates, on behalf of the purchasers of
automobiles from the borrowers. It is contended by the plaintiffs
in these five lawsuits that MetaBank and its affiliates conspired
with the borrowers to defraud such purchasers. See Footnote 4 to
the Financial Statements and Part II - Other Information, Item 1.
Legal Proceedings herein. If the Company is forced to defend
itself against this pending and threatened litigation, the Company
would incur additional legal expenses, which cannot be reasonably
estimated at this time, but which would affect overall
profitability.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds - None
----------------------------------------------------------
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits
--------
(a) Exhibits:
31.1 Section 302 certification of Chief Executive Officer.
31.2 Section 302 certification of Chief Financial Officer.
32.1 Section 906 certification of Chief Executive Officer.
32.2 Section 906 certification of Chief Financial Officer.
28
META FINANCIAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
META FINANCIAL GROUP, INC.
Date: February 14, 2007 By: /s/ J. Tyler Haahr
----------------- ----------------------------
J. Tyler Haahr, President,
and Chief Executive Officer
Date: February 14, 2007 By: /s/ Jonathan M. Gaiser
----------------- ----------------------------
Jonathan M. Gaiser, Senior Vice President,
Secretary, Treasurer, and Chief
Financial Officer
29