Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number:  0-22140

META FINANCIAL GROUP, INC.®
(Exact name of registrant as specified in its charter)

Delaware
42-1406262
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices and Zip Code)

(605) 782-1767
(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 ☒  NO☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  YES ☒  NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (Check one):

Large accelerated filer☐
Accelerated filer☒
Non-accelerated filer☐
Smaller Reporting Company☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ YES  ☒ NO

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 3, 2017:
Common Stock, $.01 par value
9,345,762 shares
Nonvoting Common Stock, $.01 par value
0 Nonvoting shares
 
 
 
 
 



META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.  
 
 
 
Item 2.
 
 
 
Item 6.
 
 

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Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
ASSETS
December 31, 2016
 
September 30, 2016
Cash and cash equivalents
$
695,731

 
$
773,830

Investment securities available for sale
936,832

 
910,309

Mortgage-backed securities available for sale
534,939

 
558,940

Investment securities held to maturity
478,611

 
486,095

Mortgage-backed securities held to maturity
126,365

 
133,758

Loans held for sale
1,223

 

Loans receivable
1,113,485

 
925,105

Allowance for loan losses
(6,415
)
 
(5,635
)
Federal Home Loan Bank Stock, at cost
3,832

 
47,512

Accrued interest receivable
21,375

 
17,199

Premises, furniture, and equipment, net
20,093

 
18,626

Bank-owned life insurance
57,934

 
57,486

Foreclosed real estate and repossessed assets
76

 
76

Goodwill
98,898

 
36,928

Intangible assets
73,472

 
28,921

Prepaid assets
35,722

 
9,443

Deferred taxes
12,420

 

Meta Payment Systems accounts receivable
6,885

 
6,334

Other assets
1,851

 
1,492

 


 
 
        Total assets
$
4,213,329

 
$
4,006,419

 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
LIABILITIES
 

 
 

Non-interest-bearing checking
$
2,473,275

 
$
2,167,522

Interest-bearing checking
41,119

 
38,077

Savings deposits
52,566

 
50,742

Money market deposits
46,856

 
47,749

Time certificates of deposit
122,334

 
125,992

Wholesale deposits
926,987

 

        Total deposits
3,663,137

 
2,430,082

Short-term debt
3,857

 
1,095,118

Long-term debt
92,479

 
92,460

Accrued interest payable
2,255

 
875

Deferred taxes

 
4,600

Accrued expenses and other liabilities
79,815

 
48,309

          Total liabilities
3,841,543

 
3,671,444

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2016 and September 30, 2016, respectively

 

Common stock, $.01 par value; 15,000,000 shares authorized, 9,305,079 shares issued and outstanding at December 31, 2016 and 8,523,641 shares issued and outstanding at September 30, 2016
93

 
85

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2016 and September 30, 2016, respectively

 

Additional paid-in capital
249,476

 
184,780

Retained earnings
127,239

 
127,190

Accumulated other comprehensive income (loss)
(5,022
)
 
22,920

         Total stockholders’ equity
371,786

 
334,975

 
 
 
 
         Total liabilities and stockholders’ equity
$
4,213,329

 
$
4,006,419

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents


META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
Three Months Ended December 31,
 
 
2016
 
2015
 
Interest and dividend income:
 
 
 
 
Loans receivable, including fees
$
10,678

 
$
8,319

 
Mortgage-backed securities
3,320

 
3,713

 
Other investments
8,577

 
6,243

 
 
22,575

 
18,275

 
Interest expense:
 

 
 

 
Deposits
938

 
163

 
FHLB advances and other borrowings
1,804

 
557

 
 
2,742

 
720

 
 
 
 
 
 
Net interest income
19,833

 
17,555

 
 
 
 
 
 
Provision (recovery) for loan losses
843

 
786

 
 
 
 
 
 
Net interest income after provision for loan losses
18,990

 
16,769

 
 
 
 
 
 
Non-interest income:
 

 
 

 
Tax product fees
625

 
135

 
Card fees
18,414

 
15,256

 
Loan fees
870

 
792

 
Bank-owned life insurance
448

 
374

 
Deposit fees
150

 
162

 
Gain (loss) on sale of securities available for sale, net (includes ($1,234) and $21 reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended December, 2016 and 2015, respectively)
(1,234
)
 
21

 
Other income (loss)
76

 
94

 
Total non-interest income
19,349

 
16,834

 
 
 
 
 
 
Non-interest expense:
 

 
 

 
Compensation and benefits
17,850

 
14,655

 
Tax product
78

 
18

 
Card processing
5,579

 
5,234

 
Occupancy and equipment
3,977

 
3,379

 
Legal and consulting
2,723

 
1,131

 
Marketing
470

 
502

 
Data processing
363

 
341

 
Amortization expense
1,525

 
1,213

 
Other expense
4,188

 
3,535

 
Total non-interest expense
36,753

 
30,008

 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
1,586

 
3,595

 
 
 
 
 
 
Income tax expense (includes ($463) and $8 income tax expense (benefit) reclassified from accumulated other comprehensive income (loss) for the three months ended December 31, 2016 and 2015, respectively)
342

 
(463
)
 
 
 
 
 
 
Net income
$
1,244

 
$
4,058

 
 
 
 
 
 
Earnings per common share:
 

 
 

 
Basic
$
0.14

 
$
0.49

 
Diluted
$
0.14

 
$
0.49

 
See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)
 
Three Months Ended
December 31,
 
 
2016
 
2015
 
Net income
$
1,244

 
$
4,058

 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
Change in net unrealized gain (loss) on securities
(45,268
)
 
2,621

 
Losses (gains) realized in net income
1,234

 
(21
)
 
 
(44,034
)
 
2,600

 
LESS: Deferred income tax effect
(16,092
)
 
974

 
Total other comprehensive income (loss)
(27,942
)
 
1,626

 
Total comprehensive income (loss)
$
(26,698
)
 
$
5,684

 

See Notes to Condensed Consolidated Financial Statements.


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Table of Contents

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended December 31, 2016 and 2015
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Treasury
Stock
 
 
Total
Stockholders’
Equity
Balance, September 30, 2015
$
82

 
$
170,749

 
$
98,359

 
$
2,455

 
$
(310
)
 
$
271,335

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.13 per share)

 

 
(1,068
)
 

 

 
(1,068
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares from the sales of equity securities
3

 
11,614

 

 

 

 
11,617

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP

 
1,060

 

 

 
310

 
1,370

 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation

 
639

 

 

 

 
639

 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains on securities, net of income taxes

 

 

 
1,626

 

 
1,626

 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
4,058

 

 

 
4,058

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
$
85

 
$
184,062

 
$
101,349

 
$
4,081

 
$

 
$
289,577

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2016
$
85

 
$
184,780

 
$
127,190

 
$
22,920

 
$

 
$
334,975

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared on common stock ($0.13 per share)

 

 
(1,195
)
 

 

 
(1,195
)
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to issuance of stock options, restricted stock and ESOP
3

 
3,245

 

 

 

 
3,248

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common shares due to acquisitions
5

 
37,291

 

 

 

 
37,296

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration equity earnout due to SCS acquisition

 
24,091

 

 

 

 
24,091

 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation

 
69

 

 

 

 
69

 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains on securities, net of income taxes

 

 

 
(27,942
)
 

 
(27,942
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
1,244

 

 

 
1,244

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
93

 
$
249,476

 
$
127,239

 
$
(5,022
)
 
$

 
$
371,786


See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents


META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Three Months Ended December 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,244

 
$
4,058

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation, amortization and accretion, net
9,479

 
8,635

Provision (recovery) for loan losses
843

 
786

Provision (recovery) for deferred taxes
(927
)
 
(1,148
)
(Gain) loss on other assets
(6
)
 
(12
)
(Gain) loss on sale of securities available for sale, net
1,234

 
(21
)
Capital lease obligations interest expense
31

 
32

Net change in accrued interest receivable
(4,176
)
 
(2,954
)
Originations of loans held for sale
(27,191
)
 

Proceeds from sales of loans held for sale
25,968

 

Change in bank-owned life insurance value
(448
)
 
(374
)
Net change in other assets
(27,164
)
 
(1,857
)
Net change in accrued interest payable
1,379

 
(43
)
Net change in accrued expenses and other liabilities
14,224

 
(11,436
)
Net cash provided by (used in) operating activities
(5,510
)
 
(4,334
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of securities available-for-sale
(144,024
)
 
(135,466
)
Proceeds from sales of securities available-for-sale
60,623

 
27,672

Proceeds from maturities and principal repayments of securities available-for-sale
30,849

 
25,646

Purchase of securities held to maturity

 
(69,526
)
Proceeds from maturities and principal repayments of securities held to maturity
13,301

 
3,029

Purchase of student loan portfolio
(136,172
)
 

Proceeds from loan sales
6,525

 

Net change in loans receivable
(59,008
)
 
(31,660
)
Net cash paid for acquisitions
(29,425
)
 

Federal Home Loan Bank stock purchases
(140,680
)
 
(193,640
)
Federal Home Loan Bank stock redemptions
184,360

 
213,240

Proceeds from the sale of premises and equipment
58

 
13

Purchase of premises and equipment
(2,899
)
 
(1,521
)
Net cash provided by (used in) investing activities
(216,492
)
 
(162,213
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in checking, savings, and money market deposits
309,726

 
928,701

Net change in time deposits
(3,658
)
 
(17,192
)
Net change in wholesale deposits
926,987

 

Net change in FHLB and other borrowings
(100,000
)
 
50,000

Net change in federal funds
(992,000
)
 
(540,000
)
Net change in securities sold under agreements to repurchase
744

 
(2,000
)
Principal payments on capital lease obligations
(18
)
 
(31
)
Cash dividends paid
(1,195
)
 
(1,068
)
Stock compensation
69

 
639

Proceeds from issuance of common stock
3,248

 
12,987

Net cash provided by (used in) financing activities
143,903

 
432,036

 
 
 
 
Net change in cash and cash equivalents
(78,099
)
 
265,489

 
 
 
 
Cash and cash equivalents at beginning of period
773,830

 
27,658

Cash and cash equivalents at end of period
$
695,731

 
$
293,147

 
 
 
 




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META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Con't.)
 
Three Months Ended December 31,
 
2016
 
2015
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
1,362

 
$
763

Income taxes
2,110

 
1,579

Franchise taxes
20

 
20

Other taxes
1

 
1

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Stock issued for acquisitions
$
(37,296
)
 
$

Contingent consideration - cash
(17,259
)
 

Contingent consideration - equity
(24,091
)
 

Purchase of available-for-sale securities accrued, not paid

 
4,264

See Notes to Condensed Consolidated Financial Statements.


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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 month period ended December 31, 2016 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2017.

The Company reclassified insignificant 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.

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 Electronic Return Originators ("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 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 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.

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The Company recognized goodwill of $30.4 million, which is calculated as the excess of both the consideration exchanged and the liabilities assumed, which were negligible, as compared to the fair value of identifiable assets acquired. Goodwill resulted from expected operational synergies and expanded product lines and is expected to be deductible for tax purposes. See Note 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 three 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 113,328 shares of Meta Financial common stock. In addition, cash contingent 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 $28.1 million of intangible assets, including customer relationships, trademark, and non-compete agreements, and negligible other assets, resulting in goodwill of $31.6 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.
The Company 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 are not observable in the market and thus represents 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 and liabilities recorded of SCS on the consolidated statement of financial condition as of December 14, 2016.


Table of Contents

 
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
17,259

   Contingent consideration - equity
24,091

      Contingent consideration payable
41,350

         Total consideration paid
59,687

 
 
Fair value of assets acquired
 
   Intangible assets
28,090

   Other assets
2

      Total assets
28,092

Fair value of net assets acquired
28,092

Goodwill resulting from acquisition
31,595


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. The Company recorded a contingent liability in the amount of $17.3 million million upon completion of the acquisition to reflect the fair market value of the potential cash earn-out payment.
The Company recognized goodwill of $31.6 million, which is calculated as the excess of both the 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 $0.5 million of pre-tax transaction related expenses during the first three 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.


Table of Contents

Smaller-balance homogeneous loans are collectively evaluated for impairment.  Such loans include premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, manufactured homes, home equity and second mortgage loans, and tax product loans.  Commercial and agricultural loans and mortgage loans secured by other properties are evaluated individually for impairment.  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 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 December 31, 2016 and September 30, 2016 are as follows:
 
December 31, 2016
 
September 30, 2016
 
(Dollars in Thousands)
1-4 Family Real Estate
$
172,877

 
$
162,298

Commercial and Multi-Family Real Estate
440,512

 
422,932

Agricultural Real Estate
64,014

 
63,612

Consumer
173,164

 
37,094

Commercial Operating
50,824

 
31,271

Agricultural Operating
33,617

 
37,083

Premium Finance
179,508

 
171,604

Total Loans Receivable
1,114,516

 
925,894

 
 
 
 
Allowance for Loan Losses
(6,415
)
 
(5,635
)
Net Deferred Loan Origination Fees
(1,031
)
 
(789
)
Total Loans Receivable, Net
$
1,107,070

 
$
919,470





11

Table of Contents

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three months ended December 31, 2016 and 2015 is 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
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
654

 
$
2,198

 
$
142

 
$
51

 
$
117

 
$
1,332

 
$
588

 
$
553

 
$
5,635

Provision (recovery) for loan losses

 
(286
)
 
334

 
(28
)
 
691

 
(3
)
 
110

 
25

 
843

Charge offs

 

 

 

 

 

 
(118
)
 

 
(118
)
Recoveries

 

 

 
24

 
5

 
12

 
14

 

 
55

Ending balance
$
654

 
$
1,912

 
$
476

 
$
47

 
$
813

 
$
1,341

 
$
594

 
$
578

 
$
6,415

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
11

 

 

 

 
339

 

 

 

 
350

Ending balance: collectively evaluated for impairment
643

 
1,912

 
476

 
47

 
474

 
1,341

 
594

 
578

 
6,065

Total
$
654

 
$
1,912

 
$
476

 
$
47

 
$
813

 
$
1,341

 
$
594

 
$
578

 
$
6,415

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
190

 
429

 

 

 
505

 

 

 

 
1,124

Ending balance: collectively
evaluated for impairment
172,687

 
440,083

 
64,014

 
173,164

 
50,319

 
33,617

 
179,508

 

 
1,113,392

Total
$
172,877

 
$
440,512

 
$
64,014

 
$
173,164

 
$
50,824

 
$
33,617

 
$
179,508

 
$

 
$
1,114,516


12

Table of Contents

 
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
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
278

 
$
1,187

 
$
163

 
$
20

 
$
28

 
$
3,537

 
$
293

 
$
749

 
$
6,255

Provision (recovery) for loan losses
7

 
7

 
8

 

 
79

 
319

 
506

 
(140
)
 
786

Charge offs

 

 

 

 

 

 
(390
)
 

 
(390
)
Recoveries

 

 

 

 

 

 
15

 

 
15

Ending balance
$
285

 
$
1,194

 
$
171

 
$
20

 
$
107

 
$
3,856

 
$
424

 
$
609

 
$
6,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually
evaluated for impairment

 
235

 

 

 

 
3,614

 

 

 
3,849

Ending balance: collectively
evaluated for impairment
285

 
959

 
171

 
20

 
107

 
242

 
424

 
609

 
2,817

Total
$
285

 
$
1,194

 
$
171

 
$
20

 
$
107

 
$
3,856

 
$
424

 
$
609

 
$
6,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance: individually
evaluated for impairment
117

 
1,341

 

 

 
8

 
4,832

 

 

 
6,298

Ending balance: collectively
evaluated for impairment
134,733

 
320,784

 
64,181

 
34,868

 
37,497

 
35,580

 
110,640

 

 
738,283

Total
$
134,850

 
$
322,125

 
$
64,181

 
$
34,868

 
$
37,505

 
$
40,412

 
$
110,640

 
$

 
$
744,581



13

Table of Contents

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 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 Bank’s balance sheet is no longer warranted.  This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
 
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, a geographic location, or an occupation.  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 Bank’s Tier 1 Capital plus the Allowance for Loan Losses.
 
The asset classification of loans at December 31, 2016 and September 30, 2016 are as follows:

December 31, 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
$
171,840

 
$
439,186

 
$
33,272

 
$
173,164

 
$
50,139

 
$
17,815

 
$
179,508

 
$
1,064,924

Watch
197

 
73

 
1,641

 

 
180

 
1,999

 

 
4,090

Special Mention
663

 
938

 
24,645

 

 

 
3,286

 

 
29,532

Substandard
177

 
315

 
4,456

 

 
165

 
10,517

 

 
15,630

Doubtful

 

 

 

 
340

 

 

 
340

 
$
172,877

 
$
440,512

 
$
64,014

 
$
173,164

 
$
50,824

 
$
33,617

 
$
179,508

 
$
1,114,516



14

Table of Contents

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, i.e., 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.

15

Table of Contents

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 Company originates a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Company offers other secured and unsecured consumer loans and currently originates most of its consumer loans in its primary market area and surrounding areas.

The Company also purchased a seasoned, floating rate, private student loan portfolio in December 2016. The portfolio is serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company. All loans are indexed to three-month LIBOR plus various margins.

The Retail Bank’s consumer loan portfolio primarily consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail 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.


16

Table of Contents

The Retail Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Retail 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.

Consumer Lending- Meta Payment Systems (“MPS”).  The Company believes that well-managed, nationwide credit programs can help meet legitimate credit needs for prime and sub-prime borrowers, and affords the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to economic downturns.  Therefore, MPS designs and administers certain credit programs that seek to accomplish these objectives.  The MPS Credit Committee, consisting of members of executive management of the Company, is charged with monitoring, evaluating and reporting portfolio performance and the overall credit risk posed by its credit products. All proposed credit programs must first be reviewed and approved by the committee before such programs are presented to the Bank’s Board of Directors for approval.  The Board of Directors of the Bank is ultimately responsible for final approval of any credit program.

MPS strives to offer consumers innovative payment products, including credit products.  Most credit products have fallen into the category of portfolio lending.  MPS continues developing new alternative portfolio lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.

A Portfolio Credit Policy, which has been approved by the Board of Directors, governs portfolio credit initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying source of repayment.  Several portfolio lending programs also have a contractual provision that requires the Bank to be indemnified for credit losses that meet or exceed predetermined levels.  Such a program carries additional risks not commonly found in sponsorship programs, specifically funding and credit risk.  Therefore, MPS has strived to employ policies, procedures and information systems that it believes commensurate with the added risk and exposure.

The Company recognizes concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location or an occupation. 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 Bank’s Tier 1 Capital plus the Allowance for Loan Losses. The MPS Credit Committee monitors and identifies the credit concentrations in accordance with the Bank’s concentration policy and evaluates the specific nature of each concentration to determine the potential risk to the Bank. An evaluation includes the following:
A recommendation regarding additional controls needed to mitigate the concentration exposure.
A limitation or cap placed on the size of the concentration.
The potential necessity for increased capital and/or credit reserves to cover the increased risk caused by the concentration(s).
A strategy to reduce to acceptable levels those concentration(s) that are determined to create undue risk to the Bank.

17

Table of Contents

Through its tax divisions, MetaBank also provides short-term consumer refund advance loans. Taxpayers are underwritten to determine eligibility for the advances and the advances are unsecured. 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 to collect. In the event of default, MetaBank has no recourse with the tax consumer. Generally, when the refund advance loan becomes delinquent for 90 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance. The Company expects this portfolio to expand significantly following its agreements with H&R Block and Jackson Hewitt to offer such loans during the 2017 tax season.
Certain tax consumer loan balances are classified as held for sale on the statement of financial condition as they will be sold to participating financial institutions.
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 electronic return originators (“EROs”).  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 current credit analysis.  Nonetheless, 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 Refund Advantage and EPS divisions, MetaBank 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 advances and the advances are unsecured. Due to the nature of ERO advance loans, it typically takes no more than three e-file cycles once the return is accepted to begin collection. Generally, when the ERO advance loan becomes delinquent for 90 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.


18

Table of Contents

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 December 31, 2016 and September 30, 2016 were as follows:

December 31, 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
$
98

 
$

 
$
382

 
$
480

 
$
172,285

 
$
112

 
$
172,877

Commercial and Multi-Family Real Estate
3,040

 
155

 

 
3,195

 
437,317

 

 
440,512

Agricultural Real Estate
1,146

 
1,060

 

 
2,206

 
61,808

 

 
64,014

Consumer
309

 

 
29

 
338

 
172,826

 

 
173,164

Commercial Operating

 

 

 

 
50,319

 
505

 
50,824

Agricultural Operating

 

 

 

 
33,617

 

 
33,617

Premium Finance
1,080

 
431

 
1,207

 
2,718

 
176,790

 

 
179,508

Total
$
5,673

 
$
1,646

 
$
1,618

 
$
8,937

 
$
1,104,962

 
$
617

 
$
1,114,516



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 and 90 days or more for other loan categories.  As of December 31, 2016, there were no Premium Finance loans greater than 210 days past due.

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Impaired loans at December 31, 2016 and September 30, 2016 were as follows:

 
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
December 31, 2016
(Dollars in Thousands)
Loans without a specific valuation allowance
 
 
 
 
 
1-4 Family Real Estate
$
112

 
$
112

 
$

Commercial and Multi-Family Real Estate
429

 
429

 

Total
$
541

 
$
541

 
$

Loans with a specific valuation allowance
 

 
 

 
 

1-4 Family Real Estate
$
78

 
$
78

 
$
11

Commercial Operating
$
505

 
$
505

 
$
339

Total
$
583

 
$
583

 
$
350

 
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 month periods ended December 31, 2016 and 2015.

 
Three Months Ended December 31,
 
 
2016
 
2015
 
 
Average
Recorded
Investment
 
Average
Recorded
Investment
 
 
(Dollars in Thousands)
1-4 Family Real Estate
$
172

 
$
119

 
Commercial and Multi-Family Real Estate
432

 
1,347

 
Commercial Operating
168

 
10

 
Agricultural Operating

 
5,032

 
Total
$
772

 
$
6,508

 

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 month periods ended December 31, 2016 and 2015.  Additionally, there were no TDR loans for which there was a payment default during the three month periods ended December 31, 2016 and 2015 that had been modified during the 12-month period prior to the default.





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NOTE 4.    ALLOWANCE FOR LOAN LOSSES

At December 31, 2016, the Company’s allowance for loan losses increased to $6.4 million from $5.6 million at September 30, 2016.  During the three months ended December 31, 2016, the Company recorded a provision for loan losses of $0.8 million. The Company had $0.1 million of net charge offs for the three months ended December 31, 2016, compared to $0.4 million for the three months ended December 31, 2015.

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 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 high land rents 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 December 31, 2016, 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 fair value.  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.


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NOTE 5.    EARNINGS PER COMMON SHARE (“EPS”)

Basic EPS is based on the net income divided by the weighted average number of common shares outstanding during the period.  Allocated Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for EPS calculations, as they are committed to be released; unallocated ESOP shares are not considered outstanding.  All ESOP shares were allocated as of December 31, 2016 and September 30, 2016.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.

A reconciliation of net income and common stock share amounts used in the computation of basic and diluted EPS for the three months ended December 31, 2016 and 2015 is presented below.

Three Months Ended December 31,
2016
 
2015
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Earnings
 
 
 
Net Income
$
1,244

 
$
4,058

 
 
 
 
Basic EPS
 

 
 

Weighted average common shares outstanding
8,938,339

 
8,245,368

LESS: weighted average nonvested shares
151,312

 
27,311

Weighted average common shares outstanding
8,787,027

 
8,218,057

 
 
 
 
Earnings Per Common Share
 

 
 

Basic
$
0.14

 
$
0.49

 
 
 
 
Diluted EPS
 

 
 

Weighted average common shares outstanding for basic earnings per common share
8,787,027

 
8,218,057

Dilutive effect of assumed exercises of stock options, net of tax benefits
82,050

 
66,198

Weighted average common and dilutive potential common shares outstanding
8,869,077

 
8,284,255

 
 
 
 
Earnings Per Common Share
 

 
 

Diluted
$
0.14

 
$
0.49


All stock options and shares under the treasury stock method were considered in computing diluted EPS for the three months ended December 31, 2016 and 2015.



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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