Edgar Filing: META FINANCIAL GROUP INC

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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 June 30, 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 definition of “accelerated filer and large accelerated filer” in Rule 12-b2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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 August 8, 2008:
Common Stock, $.01 par value		2,601,103 Common Shares

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META FINANCIAL GROUP, INC.

FORM 10-Q

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		Page No.

Part I. Financial Information

Item 1.	Financial Statements (Unaudited):

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

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2008 and 2007	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2008 and 2007	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended June 30, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition (Unaudited)

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

	June 30, 2008			September 30, 2007
ASSETS

Cash and due from banks	$	9,310		$	1,210
Interest-bearing deposits in other financial institutions	17,904			10,110
Total cash and cash equivalents	27,214			11,320
Federal funds sold	385			75,000
Investment securities available for sale	21,910			25,960
Mortgage-backed securities available for sale	210,636			132,741
Loans receivable - net of allowance for loan losses of $4,728 at June 30, 2008 and $4,493 at September 30, 2007	423,338			355,612
Federal Home Loan and Federal Reserve Bank stock, at cost	8,238			4,015
Accrued interest receivable	4,003			4,189
Bond insurance receivable	4,143			—
Premises and equipment, net	21,917			19,707
Bank-owned life insurance	12,632			12,261
Assets related to discontinued operations, held for sale	—			35,770
Goodwill	2,046			1,508
Other assets	45,272			7,997

Total assets	$	781,734		$	686,080

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	343,406		$	260,098
Interest-bearing checking	14,830			14,600
Savings deposits	11,897			10,265
Money market deposits	42,914			81,292
Time certificates of deposit	131,449			156,723
Total deposits	544,496			522,978
Advances from Federal Home Loan Bank	112,525			68,000
Securities sold under agreements to repurchase	53,392			224
Subordinated debentures	10,310			10,310
Accrued interest payable	610			842
Contingent liability	4,293			—
Liabilities related to discontinued operations, held for sale	—			30,949
Accrued expenses and other liabilities	6,708			4,679
Total liabilities	732,334			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, 2,599,361 and 2,589,717 shares outstanding at June 30, 2008 and September 30, 2007, respectively	30			30
Additional paid-in capital	22,480			21,958
Retained earnings - substantially restricted	37,688			36,805
Accumulated other comprehensive (loss)	(3,898		)	(3,345		)
Unearned Employee Stock Ownership Plan shares	(91		)	(377		)
Treasury stock, 358,638 and 368,282 common shares, at cost, at June 30, 2008 and September 30, 2007, respectively	(6,809		)	(6,973		)
Total shareholders’ equity	49,400			48,098

Total liabilities and shareholders’ equity	$	781,734		$	686,080

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
				(As Restated)						(As Restated)
Interest and dividend income:
Loans receivable, including fees	$	6,290		$	6,319		$	19,167		$	19,101
Mortgage-backed securities	2,390			1,304			6,236			4,171
Other investments	491			1,534			2,562			5,388
	9,171			9,157			27,965			28,660
Interest expense:
Deposits	1,813			2,763			6,268			9,045
FHLB advances and other borrowings	1,367			1,295			4,216			4,082
	3,180			4,058			10,484			13,127

Net interest income	5,991			5,099			17,481			15,533

Provision for loan losses	125			(500		)	195			3,338

Net interest income after provision for loan losses	5,866			5,599			17,286			12,195

Non-interest income:
Card fees	7,509			3,627			24,466			10,884
Gain on sale of branches, net	—			3,331			—			3,331
Deposit fees	250			268			621			684
Loan fees	213			203			618			421
Gain on sale of securities available for sale, net	—			271			—			271
Gain on sale of equity securities, net	318			—			525			—
Bank-owned life insurance income	126			120			372			314
Other income	113			136			342			545
Total non-interest income	8,529			7,956			26,944			16,450

Non-interest expense:
Compensation and benefits	6,601			4,815			18,769			13,230
Card processing expense	3,569			1,595			11,670			4,837
Occupancy and equipment expense	1,732			867			4,772			2,806
Legal and consulting expense	996			628			2,225			2,144
Marketing	246			295			984			563
Data processing expense	386			164			968			683
Other expense	1,610			1,111			4,893			2,806
Total non-interest expense	15,140			9,475			44,281			27,069

Income (loss) from continuing operations before income tax expense (benefit)	(745		)	4,080			(51		)	1,576

Income tax expense (benefit) from continuing operations	(335		)	1,642			(54		)	795

Income (loss) from continuing operations	(410		)	2,438			3			781

Gain on sale from discontinued operations before taxes	—			—			2,309			—
Income (loss) from discontinued operations before taxes	—			45			76			(455		)
Income tax expense (benefit) from discontinued operations	—			(81		)	500			(269		)

Income (loss) from discontinued operations	—			126			1,885			(186		)

Net Income (loss)	$	(410	)	$	2,564		$	1,888		$	595

Basic earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.96		$	—		$	0.31
Income (loss) from discontinued operations	—			0.05			0.73			(0.07		)
Net income (loss)	$	(0.16	)	$	1.01		$	0.73		$	0.24

Diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.91		$	—		$	0.30
Income (loss) from discontinued operations	—			0.05			0.72			(0.07		)
Net income (loss)	$	(0.16	)	$	0.96		$	0.72		$	0.23

Dividends declared per common share:	$	0.13		$	0.13		$	0.39		$	0.39

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

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

(Dollars in Thousands)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
				(As Restated)						(As Restated)

Net income (loss)	$	(410	)	$	2,564		$	1,888		$	595

Other comprehensive gain (loss)
Change in net unrealized gains (losses) on securities available for sale	(5,207		)	(407		)	(1,407		)	3,630
Gains realized in net income	318			271			525			271
	(4,889		)	(136		)	(882		)	3,901
Deferred income tax effect	(1,824		)	(50		)	(329		)	1,253
Total other comprehensive income (loss)	(3,065		)	(86		)	(553		)	2,648
Total comprehensive income (loss)	$	(3,475	)	$	2,478		$	1,335		$	3,243

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

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

For the Nine Months Ended June 30, 2008 and 2007 (RESTATED)

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

									Accumulated			Unearned
									Other			Employee
			Additional						Comprehensive			Stock			Total
	Common		Paid-in			Retained			(Loss),			Ownership			Treasury			Shareholders’
	Stock		Capital			Earnings			Net of Tax			Plan Shares			Stock			Equity

Balance, September 30, 2006	$	30	$	20,969		$	36,953		$	(4,548	)	$	(509	)	$	(7,796	)	$	45,099

Cash dividends declared on common stock ($.39 per share)	—		—			(986		)	—			—			—			(986		)

Issuance of 36,120 common shares from treasury stock due to exercise of stock options	—		(227		)	—			—			—			464			237

Stock compensation	—		305			—			—			—			—			305

11,998 common shares committed to be released under the ESOP	—		70			—			—			332			—			402

Change in net unrealized gains on securities available for sale, net	—		—			—			2,106			—			—			2,106

Net income for nine months ended June 30, 2007	—		—			595			—			—			—			595

Balance, June 30, 2007	$	30	$	21,117		$	36,562		$	(2,442	)	$	(177	)	$	(7,332	)	$	47,758

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

Cash dividends declared on common stock ($.39 per share)	—		—			(1,005		)	—			—			—			(1,005		)

Issuance of 14,089 common shares from treasury stock due to exercise of stock options	—		(2		)	—			—			—			164			162

Stock compensation	—		324			—			—			—			—			324

4,252 common shares committed to be released under the ESOP	—		200			—			—			286			—			486

Net change in unrealized losses on securities available for sale, net of income taxes	—		—			—			(553		)	—			—			(553		)

Net income for nine months ended June 30, 2008	—		—			1,888			—			—			—			1,888

Balance, June 30, 2008	$	30	$	22,480		$	37,688		$	(3,898	)	$	(91	)	$	(6,809	)	$	49,400

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended June 30,
	2008			2007
				(As Restated)
Cash flows from operating activities:
Net income	$	1,888		$	595
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Effect of contribution to employee stock ownership plan	486			402
Depreciation, amortization and accretion, net	2,368			1,586
Provision for loan losses	195			3,338
Stock compensation	324			305
(Gain) on sale of branches	—			(3,331		)
(Gain) on sale of investments available for sale, net	—			(271		)
(Gain) on sale of equity investments, net	(525		)	—
(Gain) on sale of other	(79		)	(70		)
Net change in accrued interest receivable	186			354
Net change in other assets	(6,350		)	(1,372		)
Net change in accrued interest payable	(232		)	(18		)
Net change in accrued expenses and other liabilities	(24,627		)	1,348
Net cash (used in) provided by operating activities-continuing operations	(26,366		)	2,866
Net cash provided by operating activities-discontinued operations	6,029			602
Net cash (used in) provided by operating activities	(20,337		)	3,468

Cash flow from investing activities:
Purchase of securities available for sale	(102,790		)	(3,463		)
Net change in federal funds sold	74,615			(45,000		)
Proceeds from sales of securities available for sale	—			373
Net change in securities purchased under agreement to resell	—			5,891
Proceeds from maturities and principal repayments of securities available for sale	27,469			20,541
Loans purchased	(15,487		)	(66,638		)
Net change in loans receivable	(52,657		)	78,788
Proceeds from sales of foreclosed real estate	596			79
Net change in FHLB / FRB stock	(4,223		)	771
Proceeds from the sale of premises and equipment	102			—
Cash paid upon sale of branches	—			(33,665		)
Purchase of premises and equipment	(4,348		)	(2,528		)
Other, net	615			127
Net cash (used in) investing activities-continuing operations	(76,108		)	(44,724		)
Net cash provided by investing activities-discontinued operations	17,598			4,019
Net cash (used in) investing activities	(58,510		)	(40,705		)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits	46,792			4,572
Net change in time deposits	(25,274		)	(11,595		)
Net change in advances from Federal Home Loan Bank	44,525			(15,300		)
Net change in securities sold under agreements to repurchase	53,168			(14,960		)
Cash dividends paid	(1,005		)	(986		)
Proceeds from exercise of stock options	162			219
Net cash provided by (used in) financing activities-continuing operations	118,368			(38,050		)
Net cash (used in) financing activities-discontinued operations	(33,210		)	(1,476		)
Net cash provided by (used in) financing activities	85,158			(39,526		)

Net change in cash and cash equivalents	6,311			(76,763		)

Cash and cash equivalents at beginning of period	20,903			109,353
Cash and cash equivalents at end of period	$	27,214		$	32,590

META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended June 30,
	2008		2007
			(As Restated)
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	11,794	$	14,134
Income taxes	—		570

Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate	$	278	$	96
Cash received on sale of commercial bank	8,224		—

Sale of Branches:
Assets disposed of:
Loans	$	—	$	(2,223	)
Accrued interest receivable	—		(14		)
Premises and equipment	—		(130		)
Liabilities assumed by buyer:
Non-interest bearing demand, NOW, savings and money market deposits	—		11,141
Time deposits	—		28,030
Other liabilities	—		192
(Gain) on sale of branches, net	—		(3,331		)
Cash paid upon sale of branches	$	—	$	33,665

See Notes to Condensed Consolidated Financial Statements.

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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 (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 June 30, 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.

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NOTE 3. ALLOWANCE FOR LOAN LOSSES

At June 30, 2008 the Company’s allowance for loan losses was $4.7 million, an increase of $200,000 from $4.5 million at September 30, 2007. During the nine months ended June 30, 2008 the Company recorded a provision for loan losses of $195,000, which was primarily related to growth in the Company’s loan portfolio as compared to the same period in the prior fiscal year, and which included a provision for loan losses of $125,000 during the three months ended June 30, 2008. The Company’s net charge-offs for the three and nine months ended June 30, 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 nine months ended June 30, 2008 and 2007 is presented below.

Three Months Ended June 30,	2008			2007
(Dollars in Thousands, Except Share and Per Share Data)				(As Restated)

Earnings (Loss)
Income (loss) from continuing operations	$	(410	)	$	2,438
Discontinued operations, net of tax	—			126

Net income (loss)	$	(410	)	$	2,564

Basic EPS
Weighted average common shares outstanding	2,596,479			2,565,719
Less weighted average unallocated ESOP and nonvested shares	(18,976		)	(21,284		)
Weighted average common shares outstanding	2,577,503			2,544,435

Earnings (Loss) Per Common Share
Income (loss) from continuing operations	$	(0.16	)	$	0.96
Discontinued operations, net of tax	—			0.05

Net income (loss)	$	(0.16	)	$	1.01

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,577,503			2,544,435
Add dilutive effect of assumed exercises of stock options, net of tax benefits	—			118,689
Weighted average common and dilutive potential common shares outstanding	2,577,503			2,663,124

Earnings (Loss) Per Common Share
Income (loss) from continuing operations	$	(0.16	)	$	0.91
Discontinued operations, net of tax	—			0.05

Net income (loss)	$	(0.16	)	$	0.96

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Nine Months Ended June 30,	2008			2007
(Dollars in Thousands, Except Share and Per Share Data)				(As Restated)

Earnings (Loss)
Income from continuing operations	$	3		$	781
Discontinued operations, net of tax	1,885			(186		)

Net income	$	1,888		$	595

Basic EPS
Weighted average common shares outstanding	2,594,986			2,550,193
Less weighted average unallocated ESOP and nonvested shares	(19,422		)	(25,213		)
Weighted average common shares outstanding	2,575,564			2,524,980

Earnings (Loss) Per Common Share
Income from continuing operations	$	—		$	0.31
Discontinued operations, net of tax	0.73			(0.07		)

Net income	$	0.73		$	0.24

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,575,564			2,524,980
Add dilutive effect of assumed exercises of stock options, net of tax benefits	31,340			103,976
Weighted average common and dilutive potential common shares outstanding	2,606,904			2,628,956

Earnings (Loss) Per Common Share
Income from continuing operations	$	—		$	0.30
Discontinued operations, net of tax	0.72			(0.07		)

Net income	$	0.72		$	0.23

The calculation of the diluted loss per share for the three months ended June 30, 2008 does not reflect the assumed exercise of 7,846 stock options because the effect would have been anti-dilutive due to the net loss for the period. Stock options totaling 311,572 were not considered in computing diluted EPS for the three months ended June 30, 2008 because they were not dilutive. Stock options totaling 125,018 and 12,000 were not considered in computing diluted EPS for the nine months ended June 30, 2008 and 2007, respectively, because they were not dilutive.

NOTE 5. COMMITMENTS AND CONTINGENCIES

At June 30, 2008 and September 30, 2007, the Company had outstanding commitments to originate and purchase loans totaling $62.4 million and $50.3 million, respectively. It is expected that outstanding loan commitments will be funded with existing liquid assets. At June 30, 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.

Chris Dengler, et al, v. Nelson Automotive Group, Inc., et al. In the Circuit Court of South Dakota, County of Minnehaha, (Civ. No. 06-1106) a lawsuit was filed by a number of plaintiffs who had purchased vehicles naming the Bank together with a number of other defendants. The Bank, in conjunction with a roster of participating

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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 the Bank, “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, as to MetaBank only.

First Midwest Bank-Deerfield Branches, et al, v. MetaBank. U.S. District Court for the District of South Dakota, Southern Division (4:06-cv-4114). During the three months ended June 30, 2006 or shortly thereafter three lawsuits were filed against the Bank in Federal Court in Sioux Falls. Three of the complaints, previously disclosed, were related to Meta Bank’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 these three bank plaintiffs in one action. All four of these banks were plaintiffs in one consolidated federal lawsuit, as discussed below. In addition, Home Federal Bank has brought a separate action, discussed below, in state court. 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 was allowed by the United States District Court to join this action with similar claims and allegations against MetaBank. The Company believes that three of these four cases have now been resolved through mediation with no additional financial loss recognition to MetaBank. In that respect, subject to a reservation of rights, the Company’s insurance carrier has agreed to cover virtually all of the settlement amounts in the three cases and has paid for counsel to defend all four actions through discovery. Mid-Country Bank is scheduled to mediate their case with MetaBank in Minneapolis, MN in late August.

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 has been completed. Cross-motions for summary judgment have been filed and argued, and they are now pending. The case has been scheduled for trial later in November 2008. The plaintiff is seeking in excess of $4.0 million in damages; as previously disclosed, the Company intends, to vigorously defend its actions. No prediction can be made as to the outcome of the case, and therefore the Company’s actual loss, if any, associated with the Mid-Country Bank and Home Federal Bank actions cannot be determined at this time.

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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, filed in the 154th Judicial District Court of Lamb County (Cause No. 17435); The Frost National Bank v. MetaBank and Meta Financial Group, Inc., filed in the United States District Court for the Northern District of Texas (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 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. On June 25, 2008, an action was filed in the 95th Judicial District Court for Dallas County, Texas entitled Methodist Hospitals of Dallas v MetaBank and Meta Financial Group seeking recovery of a purported MetaBank CD purchased in May, 2001. Additionally, on July 14, 2008, a class action complaint was filed in the United States District Court for the District of New Hampshire entitled Guardian Angel Credit Union v MetaBank (Cause No. 08-CV-261-PB) and was filed on behalf of Guardian Angel Credit Union and all other CD purchasers similarly situated, to recover funds in connection with purported MetaBank CDs. 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. The Bank continues to receive 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 Bank 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 the Bank 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.

Other than the matters set forth above, 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.

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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 nine months ended June 30, 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	7,000		32.44		—	—
Exercised	(13,241	)	20.70		—	—
Forfeited or expired	(8,900	)	27.84		—	—
Options outstanding, June 30, 2008	409,128		$	25.96	7.00	$	5,718

Options exercisable at June 30, 2008	276,428		$	24.40	6.51	$	4,268

A summary of nonvested share activity for the nine months ended June 30, 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, June 30, 2008	6,666	$	24.43

As of June 30, 2008, stock based compensation expense not yet recognized in income totaled $830,700 which is expected to be recognized over a weighted average remaining period of 1.07 years.

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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 first reportable segment, traditional banking, consists of its banking subsidiary, MetaBank. MetaBank operates as a traditional community bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located. The second reportable segment, Meta Payment Systems® (“MPS”), is a division of MetaBank. MPS provides a number of products and services, to financial institutions and other businesses. These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, credit programs, ACH origination services, gift card programs, rebate programs, travel 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® and inter-segment eliminations. MetaBank WC is accounted for as discontinued bank operations. It is 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 nine months ended June 30, 2008 and 2007, respectively.

	Traditional			Meta Payment
	Banking			Systems®			All Others			Total

Three Months Ended June 30, 2008
Net interest income (loss)	$	3,717		$	2,526		$	(252	)	$	5,991
Provision for loan losses	125			—			—			$	125
Non-interest income	939			7,583			7			$	8,529
Non-interest expense	4,763			10,429			(52		)	$	15,140
Income (loss) from continuing operations before tax	(232		)	(320		)	(193		)	$	(745	)
Income tax expense (benefit)	(109		)	(128		)	(98		)	$	(335	)
Income (loss) from continuing operations	$	(123	)	$	(192	)	$	(95	)	$	(410	)

Inter-segment revenue (expense)	$	(1,761	)	$	1,761		$	—		$	—
Total assets	447,682			331,295			2,757			$	781,734
Total deposits	224,499			320,589			(592		)	$	544,496

(1) For the three months ended June 30, 2008, MetaBank WC had no information to report.

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	Traditional			Meta Payment
	Banking			Systems®		All Others			Total

Three Months Ended June 30, 2007
Net interest income (loss)	$	3,652		$	1,667	$	(220	)	$	5,099
Provision for loan losses	(500		)	—		—			$	(500	)
Non-interest income	4,271			3,659		26			$	7,956
Non-interest expense	4,500			4,499		476			$	9,475
Income (loss) from continuing operations before tax	3,923			827		(670		)	$	4,080
Income tax expense (benefit)	1,543			306		(207		)	$	1,642
Income (loss) from continuing operations	$	2,380		$	521	$	(463	)	$	2,438

Inter-segment revenue (expense)	$	(3,035	)	$	3,035	$	—		$	—
Total assets	432,736			236,661		(2,673		)	$	666,724
Total deposits	290,729			229,983		—			$	520,712

	West Central
Three Months Ended June 30, 2007
Net interest income	$	226
Provision for loan losses	$	—
Non-interest income, including gain on sale	$	72
Non-interest expense	$	253
Income from discontinued operations before tax	45
Income tax expense	$	(81	)
Income from discontinued operations	$	126

Inter-segment revenue (expense)	$	70
Total assets	—
Total deposits	—

	Traditional			Meta Payment
	Banking			Systems®		All Others			Total

Nine Months Ended June 30, 2008
Net interest income (loss)	$	9,229		$	8,803	$	(551	)	$	17,481
Provision for loan losses	195			—		—			$	195
Non-interest income	2,215			24,621		108			$	26,944
Non-interest expense	13,367			30,556		358			$	44,281
Income (loss) from continuing operations before tax	(2,118		)	2,868		(801		)	$	(51	)
Income tax expense (benefit)	(740		)	994		(308		)	$	(54	)
Income (loss) from continuing operations	$	(1,378	)	$	1,874	$	(493	)	$	3

Inter-segment revenue (expense)	$	(4,432	)	$	4,432	$	—		$	—
Total assets	447,682			331,295		2,757			$	781,734
Total deposits	224,499			320,589		(592		)	$	544,496

	West Central
Nine Months Ended June 30, 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	—

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Traditional

Meta Payment

Banking

Systems®

All Others

Total

Nine Months Ended June 30, 2007