FORWARD LOOKING STATEMENTS
Meta Financial Group, Inc.®, ("Meta Financial" or "the Company" or "us") and its wholly-owned subsidiary, MetaBank™ (the "Bank" or "MetaBank"), may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission("SEC"), in its reports to stockholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as "may," "hope," "will," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "continue," "could," "future" or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other "forward-looking" information. These forward-looking statements include statements with respect to the Company's beliefs, expectations, estimates, and intentions that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company's control. Such statements address, among others, the following subjects: future operating results; customer retention; loan and other product demand; important components of the Company's balance sheet and income statements; growth and expansion; new products and services, such as those offered by the Bank or Meta Payment Systems® ("MPS"), a division of the Bank; credit quality and adequacy of reserves; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United Stateseconomy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governorsof the Federal Reserve System(the "Federal Reserve"), as well as efforts of the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services offered by the Company as well as risks (including reputational and litigation) attendant thereto and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third parties; the scope of restrictions and compliance requirements imposed by the supervisory directives and/or the Consent Orders entered into by the Company and the Bank with the Office of Thrift Supervision(the functions of which were transferred to the Office of the Comptroller of the Currency(the "OCC") and the Federal Reserve) and any other such regulatory actions which may be initiated; the impact of changes in financial services' laws and regulations, including but not limited to our relationship with our regulators, the OCC and the Federal Reserve; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk in general, including, but not limited to, those risks involving the MPS division; the growth of the Company's business, as well as expenses related thereto; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default. 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. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company expressly disclaims any intent or obligation to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries. 37 -------------------------------------------------------------------------------- Table of Contents GENERAL
The Company, a registered unitary savings and loan holding company, is a
The Company's stock trades on the
The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at
December 31, 2013, compared to September 30, 2013, and the consolidated results of operations for the three months ended December 31, 2013and 2012. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended September 30, 2013.
OVERVIEW OF CORPORATE DEVELOPMENTS
MPS 2014 fiscal first quarter net income was
$2.1 millioncompared to net income of $1.5 millionin the 2013 first quarter. This increase was primarily the result of an increase in non-interest income of $1.3 millionpartially offset by an increase in non-interest expense of $0.7 million. The average internal net interest yield MPS received for its deposits was 1.25% in the 2014 fiscal first quarter and 1.30% in the comparable 2013 period.
MPS is developing a number of new credit products for fiscal year 2014, subject to OCC approval.
Retail Bankfiscal 2014 first quarter net income was $2.3 millioncompared to net income of $1.8 millionin the 2013 first quarter. The increase was primarily attributable to an increase in interest income of $1.4 million, and, to a lesser extent, a decrease in interest expense, offset in part by a decrease in non-interest income. Retail Bankchecking balances continued to grow from $67.1 millionat December 31, 2012to $77.0 million, or 14.7%, at December 31, 2013. The Company's tangible book value per common share decreased by $0.15, or 0.6%, from $23.17at September 30, 2013to $23.02per share at December 31, 2013primarily due to unrealized losses in securities as a result of market conditions.
December 31, 2013, the Company's assets grew by $115.0 million, or 6.8%, to $1.8 billioncompared to $1.7 billionat September 30, 2013. The increase in assets was reflected primarily in increases in the Company's mortgage-backed and investment securities and, to a lesser extent, in increases in net loans receivable, offset in part by a decrease in cash and cash equivalents. Total cash and cash equivalents were $31.9 millionat December 31, 2013, a decrease of $8.2 millionfrom $40.1 millionat September 30, 2013. The decline primarily was the result of the Company's investing its excess liquidity in mortgage-backed and investment securities. In general, the Company maintains its cash investments in interest-bearing overnight deposits with the FHLB of Des Moinesand the Federal Reserve Bank of Minneapolis. At December 31, 2013, the Company had no federal funds sold. The total of mortgage-backed securities ("MBS") and investment securities increased $94.2 million, or 8.1%, to $1.3 billionat December 31, 2013as compared to $1.2 billionat September 30, 2013, as investment purchases exceeded related maturities, sales, and principal pay downs. The Company's portfolio of securities consists primarily of U.S. Governmentagency and instrumentality MBS, which have relatively short expected lives and high quality non-bank qualified obligations of states and political subdivisions ("NBQ") which mature in approximately 15 years or less. Of the total of $680.6 millionof MBS, $605.4 millionare classified as available for sale, and $75.2 millionare classified as held to maturity. Of the total of $582.8 millionof investment securities, $364.9 millionare classified as available for sale and $217.9 millionare classified as held to maturity. During the three month period ended December 31, 2013, the Company purchased $49.4 millionof MBS with estimated future maturities of five years or less (primarily due to anticipated prepayments) and stated maturities of 30 years or less and $80.3 millionof investment securities available for sale, primarily high quality NBQ obligations of states and political subdivisions and U.S. Governmentguaranteed Small Business Administrationuncapped, floating rate securities. 38 -------------------------------------------------------------------------------- Table of Contents The Company's portfolio of net loans receivable increased $22.1 million, or 5.8%, to $402.5 millionat December 31, 2013from $380.4 millionat September 30, 2013. This increase primarily relates to an $11.5 millionincrease in commercial and multi-family real estate loans, a $9.9 millionincrease in residential mortgage loans, a $4.2 millionincrease in agricultural real estate loans and a $2.0 millionincrease in commercial operating loans, partially offset by a decrease of $2.4 millionin consumer loans, and $2.7 millionin agricultural operating loans. Assets held for sale at December 31, 2013remained unchanged from September 30, 2013at $1.1 milliondue to an expected sale of a branch in the Central Iowamarket. Total deposits increased $65.9 million, or 5.0%, at December 31, 2013from September 30, 2013. Deposits attributable to MPS increased by $87.2 million, or 8.2%, to $1.2 billionat December 31, 2013, compared to $1.1 billionat September 30, 2013. Additionally, certificates of deposits decreased by $26.1 millionto $105.5 millionprimarily related to a decrease in public funds on deposit as planned by the Company. The average balance of total deposits and interest-bearing liabilities was $1.6 billionfor the three month period ended December 31, 2013compared to $1.4 billionfor the same period in the prior fiscal year. Total borrowings increased $51.1 millionfrom $216.5 millionat September 30, 2012to $267.6 millionat December 31, 2013, primarily due to the increase of federal funds purchased. The Company's overnight federal funds purchased fluctuates on a daily basis due to the nature of a portion of its non-interest bearing deposit base, primarily related to payroll processing timing. At December 31, 2013, the Company's stockholders' equity totaled $142.6 million, a decrease of $0.4 millionfrom $143.0 millionat September 30, 2013, due primarily to a decrease in accumulated other comprehensive income caused by the impact of recent interest rate increases on the fair value of the Company's securities portfolio. At December 31, 2013, the Bank continues to exceed all regulatory requirements for classification as a wellcapitalized institution. See "Liquidity and Capital Resources" for further information.
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 a non-accrual status and, as a result, previously accrued interest income on the loan is reversed against current income. The loan will remain on a non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance. The Company believes that the level of allowance for loan losses at
December 31, 2013is appropriate and reflects probable losses related to these loans; however, there can be no assurance that all loans will be fully collectible or that the present level of the allowance will be adequate in the future. See "Allowance for Loan Losses" below. 39 -------------------------------------------------------------------------------- Table of Contents The table below sets forth the amounts and categories of non-performing assets in the Company's portfolio. Foreclosed assets include assets acquired in settlement of loans. Non-Performing Assets As Of December 31, September 30, 2013 2013 Non-Performing Loans (Dollars in Thousands) Non-Accruing Loans: 1-4 Family (2) $ 284 $ 245 Commercial & Multi Family (1) (2) 319 427 Commercial Operating (1) (2) 6 7 Total 609 679 Accruing Loans Delinquent 90 Days or More Consumer 4 13 Total 4 13 Total Non-Performing Loans 613 692 Other Assets Foreclosed Assets: Commercial & Multi Family 116 116 Total 116 116 Total Other Assets 116 116 Total Non-Performing Assets $ 729 $ 808 Total as a Percentage of Total Assets 0.04 % 0.05 %
In addition to the non-performing TDRs in (1) and (2), the Company had an additional
Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the OCC, to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. 40 -------------------------------------------------------------------------------- Table of Contents 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, who may order the establishment of additional general or specific loss allowances. On the basis of management's review of its loans and other assets, at
December 31, 2013, the Company had classified a total of $4.5 millionof its assets as substandard and none as doubtful or loss. This compares to classifications at September 30, 2013of $7.6 millionas substandard and none as doubtful or loss. See Note 2 to the Condensed Consolidated Financial Statements. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, 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 adequate loan loss allowance. Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses. The economic slowdown, which has shown some signs of abating, continues to strain the financial condition of some borrowers. It should be noted that a sizeable portion of the Company's consumer loan portfolio is secured by residential real estate. Over the past three years, loss rates in the commercial and multi-family real estate market have remained moderate. Management believes that future losses in this portfolio may be somewhat higher than recent historical experience. Loss rates in the agricultural real estate and agricultural operating loan portfolios have been minimal in the past three years primarily due to higher commodity prices as well as above average yields which have created positive economic conditions for most farmers in our markets. Nonetheless, management still expects that future losses in this portfolio, which have been very low, could be higher than recent historical experience. Management believes that various levels of drought weather conditions within our markets have the potential to negatively impact potential yields which would have a negative economic effect on our agricultural markets. In addition, management believes the continuing low growth environment may also negatively impact consumers' repayment capacities. At December 31, 2013, the Company had established an allowance for loan losses totaling $4.3 millioncompared to $3.9 millionat September 30, 2013. 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, 2013reflects an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. The allowance for loan losses reflects management's best estimate of probable losses inherent in the portfolio based on currently available information. In addition to the factors mentioned above, future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. In addition, our regulators have the ability to order us to increase our allowance. 41 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING ESTIMATES The Company's financial statements are prepared in accordance with U.S. GAAP. 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: (i) involve the most complex and subjective decisions and assessments which may be uncertain at the time the estimate was made, and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements, management has identified the policies described below as Critical Accounting Policies. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented in Part II, Item 8 "Consolidated Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the year ended September 30, 2013and information contained herein. Allowance for Loan Losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the methodology. Although management believes the levels of the allowance at both December 31, 2013and September 30, 2013were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions or other factors could result in increasing losses. Intangible Assets. Each quarter the Company evaluates the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In accordance with ASC 350, Intangibles - Goodwill and Other, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of the Company's intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results. Self-Insurance. The Company has a self-insured healthcare plan for its employees up to certain limits. To mitigate a portion of these risks, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $60,000per individual occurrence with an unlimited lifetime maximum. The estimate of self-insurance liability is based upon known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of health claims, the approach includes a process which may differ significantly from other methodologies and still produce an estimate in accordance with U.S. GAAP. Although management believes it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments to the accrual. Deferred Tax Assets. The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized subject to management's judgment that realization is more-likely-than-not. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance. 42 -------------------------------------------------------------------------------- Table of Contents Security Impairment. Management continually monitors the investment security portfolio for impairment on a security by security basis. Management has a process in place to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, interest or dividend payment status, monitoring the rating of the security, cash flow projections, and the Company's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the Company recognizes an other-than-temporary impairment in earnings for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in earnings, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes. The amount of the credit loss component of a debt security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset- backed or floating rate security. Cash flow estimates for trust preferred securities are derived from scenario-based outcomes of forecasted default rates, loss severity, prepayment speeds and structural support. Level 3 Fair Value Measurement. U.S. GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Although management believes that it uses a best estimate of information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with U.S. GAAP. RESULTS OF OPERATIONS General.
The Company recorded net income of
Net Interest Income. Net interest income for the fiscal 2014 first quarter increased by
$1.7 million, or 19.5%, to $10.5 millionfrom $8.8 millionfor the same period in the prior fiscal year primarily due to an increase in interest income and a decrease in interest expense. Net interest margin increased to 2.71% for the first quarter of fiscal year 2014 as compared to 2.50% for the same period in fiscal year 2013. On the asset side, the increase was primarily driven by an increase in volume and yield in the securities portfolio. Of particular note is the increase in yield of the MBS portfolio due to lower premium amortization on slower prepayments speeds. The relative growth in the loan portfolio also aided net interest margin expansion. 43 -------------------------------------------------------------------------------- Table of Contents The Company's asset yields increased by 14 basis points resulting partially from a change in asset mix which included a higher percentage of tax exempt income from municipal bonds in the fiscal 2014 first quarter compared to the same period in the prior fiscal year. The yield on non-MBS investment securities increased by 19 basis points on a taxable equivalent yield ("TEY") basis. Asset yields moderately expanded due to increased yields on the MBS portfolio. The yield on government related MBS increased 29 basis points. Average quarterly TEY on the securities portfolio increased by 26 basis points in the first quarter of fiscal 2014 compared to the same quarter of the prior year. Net interest margin was also positively impacted by a 7 basis points decrease in the total cost of funds. This decrease was primarily due to a decrease in the cost of time deposits due to lower rates on CD renewals. The Company's average interest-earning assets for the fiscal 2014 first quarter grew by $185.2 million, or 12.0%, to $1.73 billion, up from $1.54 billionduring the same quarter last fiscal year. The Company's average total deposits and interest-bearing liabilities for the 2014 first fiscal quarter increased $175.3 million, or 12.1%, to $1.63 billionfrom $1.45 billionfor the same quarter last year. This increase was generated primarily from an increase in MPS-related non-interest bearing deposits, time deposits and overnight federal funds purchased, slightly offset by a decrease in Federal Home Loan Bankadvances and other borrowings. MPS average quarterly deposits for the 2014 first fiscal quarter increased $96.4 million, or 8.9%, from the same period last year. This increase resulted almost entirely from growth in existing core prepaid card programs. Overall, rates on all deposits and interest-bearing liabilities decreased by 7 basis points from 0.23% in the 2013 first fiscal quarter to 0.16% in the 2014 period. At December 31, 2013, low- and no-cost checking deposits represented 90.5% of total deposits compared to 91.5% one year earlier. The growth in deposits was driven by an increase of $39.3 million, or 3.5%, in deposits generated by MPS at December 31, 2013as compared to one year earlier. 44 -------------------------------------------------------------------------------- Table of Contents The following tables present, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax equivalent adjustments have been made in yield on interest bearing assets and net interest margin. Non-accruing loans have been included in the table as loans carrying a zero yield. Three Months Ended December 31, 2013 2012 (Dollars in Thousands) Average Interest Average Interest Outstanding Earned / Yield / Outstanding Earned / Yield / Balance Paid Rate Balance Paid Rate Interest-earning assets: Loans receivable $ 393,983 $ 4,4714.50 % $ 329,596 $ 4,1274.97 % Mortgage-backed securities 703,933 3,683 2.08 % 651,834 2,934 1.79 % Other investments and fed funds sold 630,953 3,008 2.71 % 562,203 2,569 2.48 % Total interest-earning assets 1,728,869 $ 11,1622.86 % 1,543,633 $ 9,6302.72 % Non-interest-earning assets 56,685 73,531 Total assets $ 1,785,554 $ 1,617,164Non-interest bearing deposits $ 1,208,199$ - 0.00 % $ 1,102,822$ - 0.00 % Interest-bearing liabilities: Interest-bearing checking 30,828 25 0.32 % 32,196 40 0.49 % Savings 26,127 8 0.12 % 26,229 10 0.15 % Money markets 39,820 20 0.20 % 39,785 28 0.28 % Time deposits 129,672 220 0.67 % 96,857 347 1.42 % FHLB advances 7,000 125 7.08 % 11,000 168 6.06 % Overnight fed funds purchased 162,468 122 0.30 % 116,352 97 0.33 % Other borrowings 21,525 129 2.38 % 25,049 143 2.26 % Total interest-bearing liabilities 417,440 649 0.62 % 347,468 833 0.95 % Total deposits and interest-bearing liabilities 1,625,639 $ 6490.16 % 1,450,290 $ 8330.23 % Other non-interest bearing liabilities 12,869 20,680 Total liabilities 1,638,508 1,470,970 Shareholders' equity 147,046 146,194 Total liabilities and shareholders' equity $ 1,785,554 $ 1,617,164Net interest income and net interest rate spread including non-interest bearing deposits $ 10,5132.70 % $ 8,7972.49 % Net interest margin 2.71 % 2.50 % 45
-------------------------------------------------------------------------------- Table of Contents The following table presents, for the periods indicated, the Company's total dollar amount of interest income from average securities portfolio assets and the resulting yields expressed both in dollars and rates. Tax equivalent adjustments have been made in yield. Actual quarter end yields were higher than average quarterly yields for the fiscal first quarter 2014. Three Months Ended December 31, 2013 2012 (Dollars in Thousands) Average Interest Average Interest Outstanding Earned / Yield / Outstanding Earned / Yield / Balance Paid Rate Balance Paid Rate Securities Portfolio assets: Mortgage-backed securities 703,933 3,683 2.08 % 651,834 2,934 1.79 % Investment Securities 559,282 2,981 3.04 % 489,083 2,569 2.85 % Total Securities Portfolio 1,263,215
$ 6,6642.50 % 1,140,917 $ 5,5042.24 %
(1) Tax rate used to arrive at a Taxable Equivalent Yield for three months ended
(2) Tax rate used to arrive at a Taxable Equivalent Yield for three months ended
December 2012is 35%
Provision for Loan Losses. The Company did not record a provision for loan losses in three month period ended
Non-Interest Income. Non-interest income for the fiscal 2014 first quarter increased slightly by
$0.2 million, or 1.3%, to $13.6 millionfrom $13.4 millionfor the same period in the prior fiscal year. The change was due to an increase of $1.4 millionin card fee income along with a decrease in loss on sale of foreclosed real estate of $0.4 millionand was partially offset by a decrease in gain on sale of securities available for sale of $1.7 million. Fees earned on MPSrelated programs increased to $12.9 millionfor the first quarter of fiscal year 2014, compared to $11.5 millionfor the same period in fiscal year 2013. Non-Interest Expense. Non-interest expense increased to $19.1 millionfor the first quarter of fiscal year 2014 as compared to $18.1 millionfor the same period in fiscal year 2013. Compensation expense increased $0.7 millionto $9.0 millionfor the three months ended December 31, 2013as compared to $8.3 millionfor the same period in fiscal year 2013 due primarily to a 3.0% increase in overall staffing. Card processing expense increased $0.6 millionto $4.3 millionfor the three months ended December 31, 2013as compared to $3.7 millionfor the same period in fiscal year 2013. Legal and consulting expenses increased $0.5 millionto $1.4 millionfor the three months ended December 31, 2013as compared to $0.9 millionfor the same period in fiscal year 2013. Income Tax. Income tax expense for the first quarter of fiscal year 2014 was $1.0 million, or an effective tax rate of 20.6%, compared to income tax expense of $1.0 million, or an effective tax rate of 24.3%, for the same period in the prior fiscal year. The decrease in effective tax rate is mainly the result of an increase in the volume of tax exempt municipal bonds owned by the Company. To a lesser extent, the decrease is also a result of the purchase of additional bank-owned life insurance in late December 2012.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions, and competition. 46 -------------------------------------------------------------------------------- Table of Contents 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, 2013, the Company had commitments to originate and purchase loans and unused lines of credit totaling $89.5 million. The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. At December 31, 2013, the Company had three commitments to purchase securities held to maturity totaling $1.1 million. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) to average assets (as defined). As of December 31, 2013, the Bank met all capital adequacy requirements. The Bank's actual and required capital amounts and ratios are presented in the following table. Minimum Requirement to Be Minimum Well Capitalized Requirement For Under Prompt Capital Adequacy Corrective Action Actual Purposes Provisions
At December 31, 2013 Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) MetaBank Tangible capital (to tangible assets)
$ 164,4629.01 % $ 27,3941.50 % $ n/ a n/a % Tier 1 (core) capital (to adjusted total assets) 164,462 9.01 73,050 4.00 91,312 5.00 Tier 1 (core) capital (to risk-weighted assets) 164,462 22.28 29,527 4.00 44,291 6.00 Total risk-based capital (to risk-weighted assets) 168,720 22.86 59,055 8.00 73,819 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
July 2013, the Bank's primary federal regulator, the Federal Reserve, and the Bank's primary federal regulator, the OCC, approved final rules (the "Basel III Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision's(the "Basel Committee") December 2010final capital framework referred to as "Basel III" for strengthening international capital standards. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including us and the Bank, as compared to the current U.S. general risk-based capital rules. The Basel III Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions' regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee's 1988 "Basel I" capital accords, with a more risk-sensitive approach based, in part, on the "standardized approach" in the Basel Committee's 2004 "Basel II" capital accords. In addition, the Basel III Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies' rules. The Basel III Capital Rules are effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.
We believe that the Bank will be able to meet targeted capital ratios upon implementation of the revised requirements, as finalized.
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