Edgar Filing: META FINANCIAL GROUP INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transaction period from to

Commission File Number: 0-22140

META FINANCIAL GROUP, INC. ^®

(Exact name of registrant as specified in its charter)

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

121 East Fifth Street, Storm Lake, Iowa 50588

(Address of principal executive offices)

(712) 732-4117

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a 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 o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class:		Outstanding at May 14, 2008:
Common Stock, $.01 par value		2,596,084 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

		Page No.

Part I.Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of Financial Condition as of March 31, 2008 and September 30, 2007	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2008 and 2007	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2008 and 2007	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	28

Item 4T.	Controls and Procedures	30

Part II. Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Submission of Matters to a Vote of Security Holders	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

Signatures		32

META FINANCIAL GROUP, INC.^®

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

	March 31, 2008			September 30, 2007
ASSETS

Cash and due from banks	$	1,671		$	1,210
Interest-bearing deposits in other financial institutions	62,881			10,110
Total cash and cash equivalents	64,552			11,320
Federal funds sold	—			75,000
Investment securities available for sale	23,512			25,960
Mortgage-backed securities available for sale	225,750			132,741
Loans receivable - net of allowance for loan losses of $4,581 at March 31, 2008 and $4,493 at September 30, 2007	403,954			355,612
Federal Home Loan and Federal Reserve Bank stock, at cost	7,570			4,015
Accrued interest receivable	3,900			4,189
Bond insurance receivable	4,193			—
Premises and equipment, net	22,071			19,707
Bank-owned life insurance	12,507			12,261
Assets related to discontinued operations, held for sale	—			35,770
Goodwill	1,933			1,508
Other assets	40,593			7,997

Total assets	$	810,535		$	686,080

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	357,037		$	260,098
Interest-bearing checking	17,226			14,600
Savings deposits	10,406			10,265
Money market deposits	68,883			81,292
Time certificates of deposit	140,371			156,723
Total deposits	593,923			522,978
Advances from Federal Home Loan Bank	55,000			68,000
Securities sold under agreements to repurchase	82,214			224
Subordinated debentures	10,310			10,310
Accrued interest payable	760			842
Contingent liability	4,218			—
Liabilities related to discontinued operations, held for sale	—			30,949
Accrued expenses and other liabilities	11,234			4,679
Total liabilities	757,659			637,982

SHAREHOLDERS’ EQUITY
Preferred stock, 800,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $.01 par value; 5,200,000 shares authorized, 2,957,999 shares issued, 2,596,084 and 2,589,717 shares outstanding at March 31, 2008 and September 30, 2007, respectively	30			30
Additional paid-in capital	22,299			21,958
Retained earnings - substantially restricted	38,435			36,805
Accumulated other comprehensive (loss)	(833		)	(3,345		)
Unearned Employee Stock Ownership Plan shares	(160		)	(377		)
Treasury stock, 361,915 and 368,282 common shares, at cost, at March 31, 2008 and September 30, 2007, respectively	(6,895		)	(6,973		)
Total shareholders’ equity	52,876			48,098

Total liabilities and shareholders’ equity	$	810,535		$	686,080

See Notes to Condensed Consolidated Financial Statements.

META FINANCIAL GROUP, INC. ^®

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2008		2007			2008		2007
			(As Restated)					(As Restated)
Interest and dividend income:
Loans receivable, including fees	$	6,599	$	6,297		$	12,877	$	12,782
Mortgage-backed securities	2,339		1,391			3,846		2,867
Other investments	957		2,032			2,071		3,854
	9,895		9,720			18,794		19,503
Interest expense:
Deposits	2,031		2,975			4,455		6,282
FHLB advances and other borrowings	1,648		1,302			2,849		2,787
	3,679		4,277			7,304		9,069

Net interest income	6,216		5,443			11,490		10,434

Provision for loan losses	200		(225		)	70		3,838

Net interest income after provision for loan losses	6,016		5,668			11,420		6,596

Non-interest income:
Card fees	11,514		3,671			16,957		7,257
Loan fees	207		244			405		480
Deposit fees	177		129			371		154
Bank-owned life insurance income	124		120			246		194
Gain on sale of securites available for sale, net	198		—			207		—
Other income	65		229			229		409
Total non-interest income	12,285		4,393			18,415		8,494

Non-interest expense:
Compensation and benefits	6,451		4,483			12,168		8,415
Card processing expense	5,044		1,589			8,101		3,242
Occupancy and equipment expense	1,795		1,024			3,040		1,939
Legal and consulting expense	790		780			1,229		1,516
Marketing	394		289			738		455
Data processing expense	322		107			582		332
Other expense	1,559		738			3,283		1,694
Total non-interest expense	16,355		9,010			29,141		17,593

Income (loss) from continuing operations before income tax expense (benefit)	1,946		1,051			694		(2,503		)

Income tax expense (benefit) from continuing operations	743		412			281		(847		)

Income (loss) from continuing operations	1,203		639			413		(1,656		)

Gain on sale from discontinued operations before taxes	2,309		—			2,309		—
Income (loss) from discontinued operations before taxes	4		152			76		(501		)
Income tax expense (benefit) from discontinued operations	478		56			500		(188		)

Income (loss) from discontinued operations	1,835		96			1,885		(313		)

Net Income (loss)	$	3,038	$	735		$	2,298	$	(1,969	)

Basic earnings (loss) per common share:
Income (loss) from continuing operations	$	0.47	$	0.25		$	0.16	$	(0.66	)
Income (loss) from discontinued operations	0.71		0.04			0.73		(0.12		)
Net income (loss)	$	1.18	$	0.29		$	0.89	$	(0.78	)

Diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	0.46	$	0.24		$	0.16	$	(0.66	)
Income (loss) from discontinued operations	0.70		0.04			0.71		(0.12		)
Net income (loss)	$	1.16	$	0.28		$	0.87	$	(0.78	)

Dividends declared per common share:	$	0.13	$	0.13		$	0.26	$	0.26

See Notes to Condensed Consolidated Financial Statements.

META FINANCIAL GROUP INC.^®

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in Thousands)

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2008		2007		2008		2007
			(As Restated)				(As Restated)

Net income (loss)	$	3,038	$	735	$	2,298	$	(1,969	)

Other comprehensive gain (loss)
Change in net unrealized gains (losses) on securities available for sale	1,749		774		3,800		3,495
Gains realized in net income	198		—		207		—
	1,947		774		4,007		3,495
Deferred income tax effect	726		289		1,495		1,303
Total other comprehensive income (loss)	1,221		485		2,512		2,192
Total comprehensive income (loss)	$	4,259	$	1,220	$	4,810	$	223

See Notes to Condensed Consolidated Financial Statements.

META FINANCIAL GROUP, INC.^®

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended March 31, 2008 and 2007 (RESTATED)

(Dollars in Thousands, Except Share and Per Share Data)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss), Net of Tax			Unearned Employee Stock Ownership Plan Shares			Treasury Stock			Total Shareholders’ Equity
Balance, September 30, 2006	$	30	$	20,969		$	36,953		$	(4,548	)	$	(509	)	$	(7,796	)	$	45,099

Cash dividends declared on common stock ($.26 per share)	—		—			(663		)	—			—			—			(663		)

Issuance of 5,636 common shares from treasury stock due to exercise of stock options	—		(227		)	—			—			—			339			112

Stock compensation	—		170			—			—			—			—			170

3,999 common shares committed to be released under the ESOP	—		46			—			—			185			—			231

Change in net unrealized gains on securities available for sale, net	—		—			—			2,192			—			—			2,192

Net loss for six months ended March 31, 2007	—		—			(1,969		)	—			—			—			(1,969		)

Balance, March 31, 2007	$	30	$	20,958		$	34,321		$	(2,356	)	$	(324	)	$	(7,457	)	$	45,172

Balance, September 30, 2007	$	30	$	21,958		$	36,805		$	(3,345	)	$	(377	)	$	(6,973	)	$	48,098

Cash dividends declared on common stock ($.26 per share)	—		—			(668		)	—			—			—			(668		)

Issuance of 3,967 common shares from treasury stock due to exercise of stock options	—		10			—			—			—			78			88

Stock compensation	—		224			—			—			—			—			224

6,378 common shares committed to be released under the ESOP	—		107			—			—			217			—			324

Net change in unrealized gains on securities available for sale, net of income taxes	—		—			—			2,512			—			—			2,512

Net income for six months ended March 31, 2008	—		—			2,298			—			—			—			2,298

Balance, March 31, 2008	$	30	$	22,299		$	38,435		$	(833	)	$	(160	)	$	(6,895	)	$	52,876

See Notes to Condensed Consolidated Financial Statements.

META FINANCIAL GROUP, INC.^®

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Six Months Ended March 31,
	2008			2007
				(As Restated)
Cash flows from operating activities:
Net income (loss)	$	2,298		$	(1,969	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Effect of contribution to employee stock ownership plan	324			231
Depreciation, amortization and accretion, net	1,545			1,206
Provision for loan losses	70			3,838
Stock compensation	224			170
(Gain) on sale of other	(52		)	(48		)
Net change in accrued interest receivable	289			464
Net change in other assets	(1,741		)	(817		)
Net change in accrued interest payable	(82		)	207
Net change in accrued expenses and other liabilities	(20,176		)	(1,218		)
Net cash (used in) provided by operating activities-continuing operations	(17,301		)	2,064
Net cash provided by operating activities-discontinued operations	6,029			598
Net cash (used in) provided by operating activities	(11,272		)	2,662

Cash flow from investing activities:
Purchase of securities available for sale	(102,790		)	—
Net change in federal funds sold	75,000			(100,000		)
Net change in securities purchased under agreement to resell	—			5,891
Proceeds from maturities and principal repayments of securities available for sale	15,725			12,732
Loans purchased	(7,313		)	(54,840		)
Net change in loans receivable	(41,348		)	57,104
Proceeds from sales of foreclosed real estate	329			33
Net change in FHLB / FRB stock	(3,555		)	713
Proceeds from the sale of premises and equipment	97			—
Purchase of premises and equipment	(3,759		)	(1,393		)
Other, net	(1,208		)	358
Net cash (used in) investing activities-continuing operations	(68,822		)	(79,402		)
Net cash provided by investing activities-discontinued operations	17,598			2,874
Net cash (used in) investing activities	(51,224		)	(76,528		)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits	87,297			19,261
Net change in time deposits	(16,352		)	(6,990		)
Net repayments of advances from Federal Home Loan Bank	(13,000		)	(13,000		)
Net change in securities sold under agreements to repurchase	81,990			(9,896		)
Cash dividends paid	(668		)	(663		)
Proceeds from exercise of stock options	88			112
Other, net	—			(245		)
Net cash provided by (used in) financing activities-continuing operations	139,355			(11,421		)
Net cash (used in) provided by financing activities-discontinued operations	(33,210		)	419
Net cash provided by (used in) financing activities	106,145			(11,002		)

Net change in cash and cash equivalents	43,649			(84,868		)

Cash and cash equivalents at beginning of period	20,903			109,353
Cash and cash equivalents at end of period	$	64,552		$	24,485

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	7,984		$	9,521
Income taxes	—			582

Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate	$	301		$	—
Cash received on sale of commercial bank	8,224			—

See Notes to Consolidated Financial Statements.

META FINANCIAL GROUP, INC. ^®

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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, 2007, filed as Exhibit 13 to Meta Financial Group, Inc.’s (“Meta Group” or the “Company”) Form 10-K filed with the Securities and Exchange Commission on January 11, 2008. Accordingly, footnote disclosures, which would substantially duplicate the disclosure 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 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 interim period ended March 31, 2008, are not necessarily indicative of the results expected for the year ending September 30, 2008.

NOTE 2. DISCONTINUED BANK OPERATIONS

Sale of MetaBank West Central

On November 29, 2007, the Company entered into an agreement to sell MetaBank West Central (“MetaBank WC”). MetaBank WC has three branch offices in Stuart, Casey, and Menlo, Iowa. MetaBank WC is a state chartered commercial bank whose primary federal regulator is the Federal Reserve Bank of Chicago. On March 28, 2008 the Company consummated the sale of MetaBank WC to Anita Bancorporation (Iowa). The transaction involved the sale of the stock of MetaBank WC for approximately $8.2 million and generated a pre-tax gain on sale of $2.3 million. The activity related to Meta Bank WC is accounted for as discontinued operations.

Activities related to discontinued bank operations have been recorded separately with current and prior period amounts reclassified as assets and liabilities related to discontinued operations on the condensed consolidated statements of financial condition and as discontinued operations on the condensed consolidated statements of operations and cash flows. The notes to the condensed consolidated financial statements have also been adjusted to eliminate the effect of discontinued bank operations.

NOTE 3. ALLOWANCE FOR LOAN LOSSES

At March 31, 2008 the Company’s allowance for loan losses was $4.6 million, an increase of $100,000 from $4.5 million at September 30, 2007. During the six months ended March 31, 2008 the Company recorded a provision for loan losses of $70,000, which was directly related to loan growth and continued improvement in the Company’s loan portfolio as compared to the same period in the prior fiscal year. During the three months ended March 31, 2008 the Company recorded a provision for loan losses of $200,000. The Company’s net charge-offs for the three and six months ended March 31, 2008 were minimal. Further discussion of this change in the allowance is included in “Non-performing Assets and Allowance for Loan Loss” in Management’s Discussion and Analysis.

NOTE 4. EARNINGS PER COMMON SHARE (“EPS”)

Basic EPS is computed by dividing income (loss) available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.

A reconciliation of the income (loss) and common stock share used in the computation of basic and diluted EPS for the three and six months ended March 31, 2008 and 2007 is presented below.

Three Months Ended March 31,	2008			2007
(Dollars in Thousands, Except Share and Per Share Data)				(As Restated)

Earnings
Income from continuing operations	$	1,203		$	639
Discontinued operations, net of tax	1,835			96

Net income	$	3,038		$	735

Basic EPS
Weighted average common shares outstanding	2,595,165			2,549,631
Less weighted average unallocated ESOP and nonvested shares	(19,334		)	(25,283		)
Weighted average common shares outstanding	2,575,831			2,524,348

Earnings Per Common Share
Income from continuing operations	$	0.47		$	0.25
Discontinued operations, net of tax	0.71			0.04

Net income	$	1.18		$	0.29

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,575,831			2,524,348
Add dilutive effect of assumed exercises of stock options, net of tax benefits	44,634			96,366
Weighted average common and dilutive potential common shares outstanding	2,620,465			2,620,714

Earnings Per Common Share
Income from continuing operations	$	0.46		$	0.24
Discontinued operations, net of tax	0.70			0.04

Net income	$	1.16		$	0.28

Six Months Ended March 31,	2008			2007
(Dollars in Thousands, Except Share and Per Share Data)				(As Restated)

Earnings (Loss)
Income (loss) from continuing operations	$	413		$	(1,656	)
Discontinued operations, net of tax	1,885			(313		)

Net income (loss)	$	2,298		$	(1,969	)

Basic EPS
Weighted average common shares outstanding	2,593,860			2,542,440
Less weighted average unallocated ESOP and nonvested shares	(19,758		)	(27,174		)
Weighted average common shares outstanding	2,574,102			2,515,266

Earnings (Loss) Per Common Share
Income (loss) from continuing operations	$	0.16		$	(0.66	)
Discontinued operations, net of tax	0.73			(0.12		)

Net income (loss)	$	0.89		$	(0.78	)

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,574,102			2,515,266
Add dilutive effect of assumed exercises of stock options, net of tax benefits	64,231			—
Weighted average common and dilutive potential common shares outstanding	2,638,333			2,515,266

Earnings (Loss) Per Common Share
Income (loss) from continuing operations	$	0.16		$	(0.66	)
Discontinued operations, net of tax	0.71			(0.12		)

Net income (loss)	$	0.87		$	(0.78	)

The calculation of the diluted loss per share for the six months ended March 31, 2007 does not reflect the assumed exercise of 89,207 stock options because the effect would have been anti-dilutive due to the net loss for the period. Stock options totaling 125,018 were not considered in computing diluted EPS for the three months ended March 31, 2008 because they were not dilutive. Stock options totaling 111,018 and 6,000 were not considered in computing diluted EPS for the six months ended March 31, 2008 and 2007, respectively, because they were not dilutive.

NOTE 5. COMMITMENTS AND CONTINGENCIES

At March 31, 2008 and September 30, 2007, the Company had outstanding commitments to originate and purchase loans totaling $64.7 million and $50.3 million, respectively. It is expected that outstanding loan commitments will be funded with existing liquid assets. At March 31, 2008, the Company had no commitments to purchase or sell securities available for sale.

Legal Proceedings

MetaBank (“the Bank”) has been named in several lawsuits whose eventual outcome could have an adverse effect on the consolidated financial position or results of operations of the Company. Because the likelihood or amount of an adverse resolution to these matters cannot currently be reasonably estimated, the Company has not recorded a contingent liability related to these potential claims.

On June 11, 2004, the Sioux Falls School District filed suit in the Second Judicial Circuit Court alleging that MetaBank, a wholly-owned subsidiary of the Company, improperly allowed funds, which belonged to the school district, to be deposited into, and subsequently withdrawn from, a corporate account established by an employee of the school district. The case has been settled and dismissed with no consequences to MetaBank.

A lawsuit was filed by a number of plaintiffs who had purchased vehicles naming MetaBank together with a number of other defendants. MetaBank, in conjunction with a roster of participating banks, had provided a series of loans and lines of credit to Dan Nelson Auto Group (“DNAG”) and South Dakota Acceptance Corporation (“SDAC”). Plaintiffs allege that the defendants, including MetaBank, “participated in the fraudulent scheme” by virtue of providing these lines of credit and loans despite being aware of the predatory consumer practices of the Nelson companies, and that MetaBank profited by receiving undisclosed “special benefits” for providing these loans. DNAG, SDAC and Nelson have since filed for bankruptcy. Plaintiffs also allege that MetaBank did not vigorously pursue claims against Nelson and fellow DNAG executive Chris Tapken in their respective personal bankruptcies in order to allow these individuals to emerge with control over assets of their former companies. The claims against J. Tyler Haahr personally and the MetaBank entities were dismissed with prejudice on January 4, 2008, and this matter is now on appeal.

In addition, as noted below, four banks have filed suit seeking recovery of loss they suffered when the Nelson Companies, including SDAC and DNAG, went out of business.

During the three months ended June 30, 2006 or shortly thereafter three lawsuits were filed against the Company’s MetaBank subsidiary. Three of the complaints are related to the Company’s alleged actions in connection with its activities as lead lender to three companies involved in auto sales, service, and financing and their owner. An additional bank, North American Banking Company, joined the First Midwest Bank-Deerfield Branches case, and these three bank plaintiffs were then joined in the action brought by First Premier Bank against MetaBank. All four of these banks are now plaintiffs in one consolidated federal lawsuit, as discussed below. In addition, Home Federal Bank has brought a separate action, discussed below, in state court.

First Premier Bank, North American Banking Company, First Midwest Bank-Deerfield Branches and Mid-Country Bank v. MetaBank (Civ. No. 06-4114). On June 28, 2006, First Midwest Bank-Deerfield Branches and Mid-Country Bank filed suit against MetaBank in South Dakota’s Second Judicial Circuit Court, Minnehaha County, in the above titled action. These consolidated complaints allege that plaintiff banks, who were participating lenders with MetaBank on a series of loans made to DNAG and SDAC, suffered damages as a result of MetaBank’s placement and administration of the loans that were the subject of the loan participation agreements. The complaint sounds in breach of contract, negligence, gross negligence, negligent misrepresentation, fraud in the inducement, unjust enrichment and breach of fiduciary duty. On July 17, 2006, MetaBank removed the case from state court to the United States District Court for the District of South Dakota, where the action has been assigned case no. Civ. 06-4114. Plaintiff(s) moved to remand the case back to state court, but this motion was denied. As noted above, North American Banking Company has been allowed by the United States District Court to join this action with similar claims and allegations against MetaBank. Discovery is continuing and the case has been scheduled for trial later in 2008.

Home Federal Bank v. J. Tyler Haahr, Daniel A. Nelson and MetaBank (Civ. No. 06-2230). On June 26, 2006, Home Federal Bank filed suit against MetaBank and two individuals, J. Tyler Haahr and Daniel A. Nelson, in South Dakota’s Second Judicial Circuit Court, Minnehaha County in the above titled action. The complaint alleges that Home Federal, a participating lender with MetaBank on a series of loans made to DNAG and SDAC, suffered damages exceeding $3.8 million as a result of failure to make disclosures regarding an investigation of Nelson, DNAG and SDAC by the Iowa Attorney General at the time Home Federal agreed to an extension of the loan participation agreements. The complaint sounds in fraud, negligent misrepresentation, breach of fiduciary duty, conspiracy and breach of duty of good faith and fair dealing. Discovery is continuing and the case has been scheduled for trial later in 2008.

These actions are currently in discovery proceedings, and the amount of costs associated with these actions cannot be determined at this time. The Company intends, however, to vigorously defend its actions. Subject to a reservation of rights, the Company’s insurance carrier has agreed to cover the four claims described above and is currently paying for counsel to defend all four actions.

Visa Litigation Matters. The Company is a member of the Visa USA network. During our 2008 first fiscal quarter, we were informed that VISA Inc. had reached a settlement in connection with the lawsuit brought against Visa by American Express in 2004 and had established a reserve related to an expected similar settlement with Discover Financial Services. In addition, the Visa organization of affiliated entities had previously announced that it had completed a series of global restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa Inc. Visa Inc. intends to issue and sell a majority of its shares to the public in an initial public offering. Subsequent to the settlement announcement, the accounting treatment by member banks for the Visa restructuring transactions, including judgment sharing agreements previously executed among the Company and Visa Inc. (“Visa”) and certain other member banks of the Visa USA network has been addressed by the ABA. Pursuant to this guidance, the Company will potentially have litigation liabilities associated with indemnification obligations under these agreements. Based on the Company’s 0.00271% membership share of Visa USA and the accounting guidance we have received, we have recorded a litigation liability and corresponding expense of $158,000 for the first fiscal quarter ending December 31, 2007. The Company also recorded a gain during the second fiscal quarter of 2008 for the redemption of its shares related to Visa’s initial public offering of $197,700 and a reversal of litigation expense of $73,500 related to the Visa IPO.

First Federal Bank Littlefield Texas ssb, formerly known as, First Federal Savings and Loan Association, Littlefield, Texas v. MetaBank, formerly known as First Federal Savings Bank of the Midwest. (Cause No. 17435). The Frost National Bank v. MetaBank and Meta Financial Group, Inc. (Cause No. 3:08-CV-625-M). On April 3, 2008, First Federal Bank, filed suit against MetaBank in Texas State Court in Lubbock seeking recovery of a purported MetaBank certificate of deposit (CD) that it claims it had purchased. On April 11, 2008, Frost National Bank, filed suit against MetaBank in the United States District Court for the District of Texas seeking a similar recovery. Earlier, MetaBank had been contacted by another institution, but could find no record of the CD it had allegedly purchased, and commenced an investigation. As a result of that investigation, it now appears that a former MetaBank employee had been selling fraudulent CDs, using MetaBank’s name and standard form of CD, to various financial institutions through an independent broker and instructing purchasers to wire the purchase money into one of a number of false accounts she had created at MetaBank. MetaBank has received a number of demands from purchasers of these fraudulent CDs in addition to the lawsuits listed above. All evidence currently available indicates that the former employee ran this fraud for her own benefit and regularly took money from the MetaBank accounts to which the purchase monies had been wired. As a result of the interruption of this fraud, there are some $4.2 million of bogus CDs still outstanding to various financial institutions. As the former employee was apparently using the funds of new victims to pay off the previous victims of her scheme, it does not appear at this time that she stole any MetaBank money as part of this fraud. MetaBank therefore does not appear at this time to have suffered any direct loss as a result of the fraud, but it may suffer a loss to the extent it is exposed to liability for claims such as these. There are unresolved questions as whether, under what theory and to what degree MetaBank might be liable for the former employee’s actions. At this time, MetaBank’s insurer has agreed to provide a defense to the two litigations in Texas under a reservation of rights.

There are no other material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation to their respective businesses.

NOTE 6. STOCK OPTION PLAN

The Company maintains the 2002 Omnibus Incentive Plan, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company. Awards are granted by the Stock Option Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

In accordance with SFAS No. 123(R), compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant. The exercise price of options or fair value of nonvested shares granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock based incentive awards has been negligible.

A summary of option activity for the six months ended March 31, 2008 is presented below:

					Weighted
			Weighted		Average
	Number		Average		Remaining	Aggregate
	of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Yrs)	Value
	(Dollars in Thousands, Except Share and Per Share Data)

Options outstanding, September 30, 2007	424,269		$	25.81	7.71	$	5,971
Granted	5,000		32.44
Exercised	(3,967	)	25.19
Forfeited or expired	(8,900	)	27.84
Options outstanding, March 31, 2008	416,402		$	25.88	7.39	$	5,854

Options exercisable at March 31, 2008	268,702		$	23.87	6.82	$	4,291

A summary of nonvested share activity for the six months ended March 31, 2008 is presented below:

		Weighted
	Number	Average
	of	Fair Market Value
	Shares	At Grant
	(Dollars in Thousands, Except Share and Per Share Data)

Nonvested shares outstanding, September 30, 2007	6,666	$	24.43
Granted	—	—
Vested	—	—
Forfeited or expired	—	—
Nonvested shares outstanding, March 31, 2008	6,666	$	24.43

As of March 31, 2008, stock based compensation expense not yet recognized in income totaled $983,000 which is expected to be recognized over a weighted average remaining period of 1.13 years.

NOTE 7. SEGMENT INFORMATION

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met. The Company has determined that it has two reportable segments. The traditional banking segment consisting of its two banking subsidiaries, MetaBank and MetaBank WC, and Meta Payment Systems^® (“MPS”), a division of MetaBank. MetaBank and MetaBank WC operate as traditional community banks providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located. MPS provides a number of products and services, primarily to third parties, including financial institutions and other businesses. These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, ACH origination services, a gift card program, rebate programs and tax related programs. Other programs are in the process of development. The remaining grouping under the caption “All Others” consists of the operations of Meta Financial Group, Inc. and Meta Trust Company^®. MetaBank WC is accounted for as discontinued bank operations. It was reported as part of the traditional banking segment and has been separately classified to show the effect of continuing operations. Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices, meaning prices that would be paid if the companies were not affiliates. The following tables present segment data for the Company for the three and six months ended March 31, 2008 and 2007, respectively.

	Traditional			Meta Payment
	Banking			Systems^®		All Others			Total

Three Months Ended March 31, 2008
Net interest income (loss)	$	3,069		$	3,226	$	(79	)	$	6,216
Provision for loan losses	200			—		—			$	200
Non-interest income	693			11,528		64			$	12,285
Non-interest expense	4,449			11,588		318			$	16,355
Income (loss) from continuing operations before tax	(887		)	3,166		(333		)	$	1,946
Income tax expense (benefit)	(157		)	1,009		(109		)	$	743
Income (loss) from continuing operations	$	(730	)	$	2,157	$	(224	)	$	1,203

Inter-segment revenue (expense)	$	(1,448	)	$	1,448	$	—		$	—
Total assets	457,923			349,610		3,002			$	810,535
Total deposits	258,721			335,202		—			$	593,923

	West Central
Three Months Ended March 31, 2008
Net interest income	$	91
Provision for loan losses	(21		)
Non-interest income, including gain on sale	2,346
Non-interest expense	145
Income from discontinued operations before tax	2,313
Income tax expense	478
Income from discontinued operations	$	1,835

Inter-segment revenue (expense)	$	83
Total assets	—
Total deposits	—

	Traditional			Meta Payment
	Banking			Systems^®		All Others			Total
	(Dollars in Thousands)

Three Months Ended March 31, 2007 (As Restated)
Net interest income (expense)	$	3,984		$	1,697	$	(238	)	$	5,443
Provision for loan losses	(225		)	—		—			(225		)
Non-interest income	678			3,691		24			4,393
Non-interest expense	4,281			4,370		359			9,010
Net income (loss) before tax	606			1,018		(573		)	1,051
Income tax expense (benefit)	225			347		(160		)	412
Net income (loss)	$	381		$	671	$	(413	)	$	639

Inter-segment revenue (expense)	$	(1,699	)	$	1,699	$	—		$	—
Total assets	460,784			229,466		(1,812		)	688,438
Total deposits	326,933			223,507		—			550,440

	West Central
Three Months Ended March 31, 2007
Net interest income (loss)	$	231
Provision for loan losses	(55		)
Non-interest income	48
Non-interest expense	182
Income from discontinued operations before tax	152
Income tax expense	56
Income from discontinued operations	$	96

Inter-segment revenue (expense)	$	—
Total assets	40,988
Total deposits	28,430

	Traditional			Meta Payment
	Banking			Systems^®		All Others			Total

Six Months Ended March 31, 2008
Net interest income (loss)	$	5,512		$	6,277	$	(299	)	$	11,490
Provision for loan losses	70			—		—			$	70
Non-interest income	1,276			17,038		101			$	18,415
Non-interest expense	8,604			20,116		421			$	29,141
Income (loss) from continuing operations before tax	(1,886		)	3,199		(619		)	$	694
Income tax expense (benefit)	(631		)	1,119		(207		)	$	281
Income (loss) from continuing operations	$	(1,255	)	$	2,080	$	(412	)	$	413

Inter-segment revenue (expense)	$	(2,671	)	$	2,671	$	—		$	—
Total assets	457,923			349,610		3,002			$	810,535
Total deposits	258,721			335,202		—			$	593,923

	West Central
Six Months Ended March 31, 2008
Net interest income	$	262
Provision for loan losses	(57		)
Non-interest income, including gain on sale	2,440
Non-interest expense	374
Income from discontinued operations before tax	2,385
Income tax expense	500
Income from discontinued operations	$	1,885

Inter-segment revenue (expense)	$	175
Total assets	—
Total deposits	—

	Traditional			Meta Payment
	Banking			Systems^®		All Others			Total
	(Dollars in Thousands)

Six Months Ended March 31, 2007 (As Restated)
Net interest income (expense)	$	7,821		$	3,084	$	(471	)	$	10,434
Provision for loan losses	3,838			—		—			3,838
Non-interest income	1,114			7,331		49			8,494
Non-interest expense	8,533			8,321		739			17,593
Net income (loss) before tax	(3,436		)	2,094		(1,161		)	(2,503		)
Income tax expense (benefit)	(1,200		)	704		(351		)	(847		)
Net income (loss)	$	(2,236	)	$	1,390	$	(810	)	$	(1,656	)

Inter-segment revenue (expense)	$	(3,066	)	$	3,066	$	—		$	—
Total assets	460,784			229,466		(1,812		)	688,438
Total deposits	326,933			223,507