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 December 31, 2010

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

For the transition period from to

Commission File Number: 0-22140

META FINANCIAL GROUP, INC. ®

(Exact name of registrant as specified in its charter)

Delaware		42-1406262
(State or other jurisdiction of		(I.R.S. 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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o 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. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller Reporting Company x

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

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

Class:		Outstanding at February 4, 2011:
Common Stock, $.01 par value		3,112,463 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 December 31, 2010 and September 30, 2010	1

	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2010 and 2009	2

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2010 and 2009	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended December 31, 2010 and 2009	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	39

Item 4.	Controls and Procedures	41

Part II. Other Information

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Removed and Reserved	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

Signatures		43

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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)

	December 31, 2010			September 30, 2010

ASSETS
Cash and cash equivalents	$	193,572		$	87,503
Federal funds sold	6,236			—
Investment securities available for sale	21,982			21,467
Mortgage-backed securities available for sale	497,635			485,385
Loans receivable - net of allowance for loan losses of $4,763 at December 31, 2010 and $5,234 at September 30, 2010	342,485			366,045
Federal Home Loan Bank Stock, at cost	4,971			5,283
Accrued interest receivable	4,330			4,759
Bond insurance receivable	3,653			3,683
Premises, furniture, and equipment, net	18,817			19,377
Bank-owned life insurance	13,929			13,796
Foreclosed real estate and repossessed assets	1,191			1,295
Goodwill and intangible assets	1,201			2,663
MPS accounts receivable	7,309			8,085
Other assets	12,344			10,425

Total assets	$	1,129,655		$	1,029,766

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	809,967		$	675,163
Interest-bearing checking	33,187			29,976
Savings deposits	10,697			10,821
Money market deposits	33,388			35,422
Time certificates of deposit	114,978			146,072
Total deposits	1,002,217			897,454
Advances from Federal Home Loan Bank	22,000			22,000
Securities sold under agreements to repurchase	6,528			8,904
Subordinated debentures	10,310			10,310
Accrued interest payable	255			392
Contingent liability	3,785			3,983
Accrued expenses and other liabilities	13,835			14,679
Total liabilities	1,058,930			957,722

SHAREHOLDERS’ EQUITY
Preferred stock, 800,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,112,463 and 3,111,413 shares outstanding at December 31, 2010 and September 30, 2010, respectively	34			34
Additional paid-in capital	32,419			32,381
Retained earnings - substantially restricted	42,791			42,475
Accumulated other comprehensive (loss)	(97		)	1,599
Treasury stock, 260,536 and 261,586 common shares, at cost, at December 31, 2010 and September 30, 2010, respectively	(4,422		)	(4,445		)
Total shareholders’ equity	70,725			72,044

Total liabilities and shareholders’ equity	$	1,129,655		$	1,029,766

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
	December 31,
	2010			2009

Interest and dividend income:
Loans receivable, including fees	$	5,447		$	6,725
Mortgage-backed securities	3,918			2,155
Other investments	255			184
	9,620			9,064
Interest expense:
Deposits	889			1,088
FHLB advances and other borrowings	453			657
	1,342			1,745

Net interest income	8,278			7,319

Provision for loan losses	(28		)	4,691

Net interest income after provision for loan losses	8,306			2,628

Non-interest income:
Card fees	14,011			19,544
Gain on sale of securities available for sale, net	526			1,854
Loan fees	201			113
Deposit fees	181			204
Bank-owned life insurance income	133			130
Other income	254			193
Total non-interest income	15,306			22,038

Non-interest expense:
Compensation and benefits	7,796			8,671
Card processing expense	5,223			8,352
Occupancy and equipment expense	2,042			2,075
Intangible Assets	1,566			—
Legal and consulting expense	1,411			991
Data processing expense	273			192
Marketing	261			355
Other expense	3,046			2,167
Total non-interest expense	21,618			22,803

Income before income tax expense	1,994			1,863

Income tax expense	1,273			671

Net income	$	721		$	1,192

Earnings per common share:
Basic	$	0.23		$	0.45
Diluted	$	0.23		$	0.45

Dividends declared per common share:	$	0.13		$	0.13

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(Dollars in Thousands)

	Three Months Ended
	December 31,
	2010			2009

Net income	$	721		$	1,192

Other comprehensive loss:
Change in net unrealized losses on securities available for sale	(3,270		)	(4,827		)
Gains realized in net income	526			1,854
	(2,744		)	(2,973		)
Deferred income tax effect	(1,048		)	(1,109		)
Total other comprehensive loss	(1,696		)	(1,864		)
Total comprehensive loss	$	(975	)	$	(672	)

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 Three Months Ended December 31, 2010 and 2009

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

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

Balance, September 30, 2009	$	30	$	23,551		$	31,626		$	(1,838	)	$	(6,024	)	$	47,345

Cash dividends declared on common stock ($.13 per share)	—		—			(343		)	—			—			(343		)

Issuance of 9,512 common shares from treasury stock due to issuance of restricted stock	—		(128		)	—			—			224			96

Stock compensation	—		129			—			—			—			129

Change in net unrealized losses on securities available for sale	—		—			—			(1,864		)	—			(1,864		)

Net income for three months ended December 31, 2009	—		—			1,192			—			—			1,192

Balance, December 31, 2009	$	30	$	23,552		$	32,475		$	(3,702	)	$	(5,800	)	$	46,555

Balance, September 30, 2010	$	34	$	32,381		$	42,475		$	1,599		$	(4,445	)	$	72,044

Cash dividends declared on common stock ($.13 per share)	—		—			(405		)	—			—			(405		)

Issuance of 1,050 common shares from treasury stock due to issuance of restricted stock	—		13			—			—			23			36

Stock compensation	—		25			—			—			—			25

Change in net unrealized losses on securities available for sale	—		—			—			(1,696		)	—			(1,696		)

Net income for three months ended December 31, 2010	—		—			721			—			—			721

Balance, December 31, 2010	$	34	$	32,419		$	42,791		$	(97	)	$	(4,422	)	$	70,725

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)

	Three Months Ended December 31,
	2010			2009

Cash flows from operating activities:
Net income	$	721		$	1,192
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net	2,576			3,135
Provision for loan losses	(28		)	4,691
(Gain) loss on sale of other	(111		)	22
Gain on sale of securities available for sale, net	(526		)	(1,854		)
Net change in accrued interest receivable	429			319
Net change in other assets	216			(5,600		)
Net change in accrued interest payable	(137		)	(61		)
Net change in accrued expenses and other liabilities	(1,042		)	(1,765		)
Net cash provided by operating activities	2,098			79

Cash flow from investing activities:
Purchase of securities available for sale	(73,092		)	(73,374		)
Net change in federal funds sold	(6,236		)	9
Proceeds from sales of securities available for sale	21,296			38,401
Proceeds from maturities and principal repayments of securities available for sale	35,192			57,138
Loans purchased	(1,039		)	(392		)
Net change in loans receivable	24,738			(32,584		)
Proceeds from sales of foreclosed real estate	104			769
Net change in Federal Home Loan Bank stock	312			2,448
Proceeds from the sale of premises and equipment	—			—
Purchase of premises and equipment	(395		)	(730		)
Other, net	1,048			1,109
Net cash provided by (used in) investing activities	1,928			(7,206		)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits	135,857			168,297
Net change in time deposits	(31,094		)	(11,539		)
Net change in advances from Federal Home Loan Bank	—			(76,500		)
Net change in securities sold under agreements to repurchase	(2,376		)	3,726
Cash dividends paid	(405		)	(343		)
Stock compensation	25			1
Proceeds from exercise of stock options	36			224
Net cash provided by financing activities	102,043			83,866

Net change in cash and cash equivalents	106,069			76,739

Cash and cash equivalents at beginning of period	87,503			6,168
Cash and cash equivalents at end of period	$	193,572		$	82,907

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	1,479		$	1,805
Income taxes	1,075			—

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, 2010 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 13, 2010. 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 (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended December 31, 2010, are not necessarily indicative of the results expected for the year ending September 30, 2011.

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NOTE 2. CREDIT DISCLOSURES

The Allowance for Loan Losses and Recorded Investment in loans for the three months ended December 31, 2010 and 2009 are as follows:

	1-4 Family Residential			Commercial and Multi Family Real Estate			Agricultural Real Estate			Consumer			Commercial Business			Agricultural Operating			Unallocated			Total
December 31, 2010

Allowance for loan losses:
Beginning balance	$	50		$	3,053		$	111		$	738		$	131		$	125		$	1,026		$	5,234
Provision charged to expense	(3		)	136			(86		)	60			(21		)	(23		)	(91		)	(28		)
Losses charged off	—			(15		)	—			(500		)	—			—			—			(515		)
Recoveries	—			—			—			72			—			—			—			72
Ending balance	$	47		$	3,174		$	25		$	370		$	110		$	102		$	935		$	4,763

Ending balance: individually evaluated for impairment	$	—		$	1,004		$	18		$	100		$	87		$	—		$	—		$	1,209
Ending balance: collectively evaluated for impairment	$	47		$	2,170		$	7		$	270		$	23		$	102		$	935		$	3,554
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Loans:
Ending balance: individually evaluated for impairment	$	—		$	9,865		$	1,804		$	207		$	174		$	—		$	—		$	12,050
Ending balance: collectively evaluated for impairment	$	38,053		$	191,146		$	19,103		$	42,036		$	16,753		$	28,107		$	—		$	335,198
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

December 31, 2009

Allowance for loan losses:
Beginning balance	$	59		$	4,231		$	111		$	243		$	792		$	569		$	988		$	6,993
Provision charged to expense	(16		)	2,632			(82		)	3,881			(537		)	(580		)	(607		)	4,691
Losses charged off	—			—			—			(133		)	—			—			—			(133		)
Recoveries	—			—			—			21			400			210			—			631
Ending balance	$	43		$	6,863		$	29		$	4,012		$	655		$	199		$	381		$	12,182

Ending balance: individually evaluated for impairment	$	20		$	6,112		$	—		$	119		$	442		$	—		$	—		$	6,693
Ending balance: collectively evaluated for impairment	$	23		$	751		$	29		$	3,893		$	213		$	199		$	381		$	5,489
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Loans:
Ending balance: individually evaluated for impairment	$	21		$	12,723		$	—		$	287		$	1,615		$	—		$	—		$	14,646
Ending balance: collectively evaluated for impairment	$	42,284		$	217,180		$	27,198		$	82,713		$	20,084		$	27,988					$	417,447
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

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The Asset Classification for the three months ended December 31, 2010 and 2009 are as follows:

December 31, 2010

	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating

Pass	$	37,607	$	164,234	$	18,424	$	41,800	$	15,989	$	20,729
Watch	757		19,838		657		102		756		5,986
Special Mention	—		7,074		22		135		7		1,392
Substandard	—		8,065		1,804		81		174		—
Doubtful	—		1,800		—		126		—		—
	$	38,364	$	201,011	$	20,907	$	42,244	$	16,926	$	28,107

December 31, 2009

	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating

Pass	$	46,057	$	199,996	$	24,427	$	81,951	$	18,021	$	21,343
Watch	692		9,467		2,730		628		1,720		—
Special Mention	166		7,717		41		134		344		6,645
Substandard	—		2,665		—		223		1,093		—
Doubtful	22		10,058		—		64		521		—
	$	46,937	$	229,903	$	27,198	$	83,000	$	21,699	$	27,988

One- to Four-Family Residential Mortgage Lending. One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate and ARM loans for both permanent structures and those under construction. The Company’s one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.

The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan-to-value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration. Residential loans generally do not include prepayment penalties.

The Company currently offers one, three, five, seven and ten year ARM loans. These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually. These loans generally provide for an annual cap of up to a 200 basis points and a lifetime cap of 600 basis points over the initial rate. As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as is the Company’s cost of funds. The Company’s ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan. The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed rate residential loans. Current market conditions make ARM loans unattractive and very few are originated.

Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards. Interest rates

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charged on these fixed-rate loans are competitively priced according to market conditions. The Company currently sells most, but not all, of its fixed-rate loans with terms greater than 15 years.

In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Most properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company has not engaged in sub-prime residential mortgage originations.

Commercial and Multi-Family Real Estate Lending. The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and has purchased whole loan and participation interests in loans from other financial institutions. The purchased loans and loan participation interests are generally secured by properties located in the Midwest and West.

The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels. Commercial and multi-family real estate loans generally have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by personal guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company currently analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.

Agricultural Lending. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm related products. Agricultural operating loans are originated at either an adjustable or fixed rate of interest for up to a one year term or, in the case of livestock, upon sale. Most agricultural operating loans have terms of one year or less. Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year. Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.

Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally, such loans provide for a fixed rate of interest for the first one to five years, which then balloon or adjust annually thereafter. In addition, such loans generally amortize over a period of ten to 20 years. Adjustable-rate agricultural real estate loans provide for a margin over the yields on the corresponding U.S. Treasury security or prime rate. Fixed-rate agricultural real estate loans generally have terms up to five years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.

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Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one- to four-family residential lending. Nevertheless, agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amount. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by many factors outside the control of the farm borrower.

Weather presents one of the greatest risks as hail, drought, floods, or other conditions, can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral. This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment. Government support programs and the Company generally require that farmers procure crop insurance coverage. Grain and livestock prices also present a risk as prices may decline prior to sale resulting in a failure to cover production costs. These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk. The Company frequently requires borrowers to use future contracts or options to reduce price risk and help ensure loan repayment. Another risk is the uncertainty of government programs and other regulations. During periods of low commodity prices, the income from government programs can be a significant source of cash to make loan payments and if these programs are discontinued or significantly changed, cash flow problems or defaults could result. Finally, many farms are dependent on a limited number of key individuals upon whose injury or death may result in an inability to successfully operate the farm.

Consumer Lending- Retail Bank. The Retail Bank offers a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits. In addition, the Retail Bank offers other secured and unsecured consumer loans. The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas. The Retail Bank originates consumer loans on both a direct and indirect basis.

The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit. Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences. The Retail Bank will lend amounts which, together with all prior liens, typically may be up to 100% of the appraised value of the property securing the loan. Home equity loans and lines of credit generally have maximum terms of five years.

The Retail Bank primarily originates automobile loans on a direct basis, but also originates indirect automobile loans on a very limited basis. Direct loans are loans made when the Retail Bank extends credit directly to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers. The Retail Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application

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of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Consumer Lending — Meta Payment Systems® (“MPS”). MPS has a loan committee consisting of members of Executive Management. The MPS Credit Committee (the “Committee”) is charged with monitoring, evaluating, and reporting portfolio performance and the overall credit risk posed by its credit products. All proposed credit programs must first be reviewed and approved by the Committee before such programs are presented to the Company’s Board of Directors. The Board of Directors is ultimately responsible for final approval of any credit program.

The Company believes that well-managed, nationwide credit programs can help meet legitimate credit needs for prime and sub-prime borrowers, and affords the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to economic downturns. Therefore, MPS designs and administers certain credit programs that accomplish these objectives. MPS’ programs are managed prudently, in accordance with governing rules and regulations, and without unnecessary exposure to the capital base. To this end, management believes that MPS administers its credit programs in conformance with federal and state laws, regulations, guidance, applicable association rules and regulations, as well as all standards and best practices for safe and sound lending. Notwithstanding this belief, our regulator ordered the termination of our nationwide iAdvance lending program; for additional information see Note 12 to the Notes to Condensed Consolidated Financial Statements.

MPS has strived to offer consumers innovative payment products, including credit products. Most credit products have fallen into one of two general categories: (1) sponsorship lending and (2) portfolio lending. In a sponsorship lending model, MPS typically originates loans and sells (without recourse) the resulting receivables to third party investors equipped to take the associated credit risk. MPS’s sponsorship lending programs are governed by the Policy for Sponsorship Lending which has been approved by the Board of Directors. A Portfolio Credit Policy which has been approved by the Board of Directors governs portfolio credit initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying source of repayment. Several portfolio lending programs also have a contractual provision that has indemnified MPS and MetaBank (the “Bank”) for credit losses that meet or exceed predetermined levels. Such a program carries additional risks not commonly found in sponsorship programs, specifically funding and credit risk. Therefore, MPS has strived to employ policies, procedures, and information systems that are commensurate with the added risk and exposure. Due to supervisory directives issued by our regulator, an MPS lending program - iAdvance — was eliminated effective October 13, 2010. In addition, the Bank’s tax-related programs, which consisted of pre-season tax-related loans and refund transfer services, are subject to prior approval of our regulator. At this time, we do not anticipate offering these programs in fiscal 2011. Finally, our third party relationship programs have been limited to existing third party relationships, absent prior approval to engage in new relationships.

The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location, or an occupation. Credit Concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Bank’s Tier 1 Capital plus the Allowance for Loan and Credit Card Losses.

The MPS Credit Committee monitors and identifies the credit concentrations and evaluates the specific nature of each concentration to determine the potential risk to the Bank. An evaluation includes the following:

· A recommendation regarding additional controls needed to mitigate the concentration exposure.

· A limitation or cap placed on the size of the concentration.

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· The potential necessity of increased capital and/or credit reserves to cover the increased risk caused by the concentration(s).

· A strategy to reduce to acceptable levels those concentration(s) that are determined to create undue risk to the Bank.

Commercial Business Lending. The Company also originates commercial business loans. Most of the Company’s commercial business loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.

The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year. The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. The Company’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis. Nonetheless, such loans are believed to carry higher credit risk than more traditional investments.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company’s commercial business loans are usually, but not always, secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Commercial business loans have been a declining percentage of the Company’s loan portfolio since 2005.

Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Office of Thrift Supervision (the “OTS”) 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 savings association 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.

When assets are classified as either substandard or doubtful, the Bank may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem 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 Banks’ determinations as to the classification of their assets and the amount of their valuation allowances are subject to review by their regulatory authorities, who may order the establishment of additional general or specific loss allowances.

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Past due loans for the three months ended December 31, 2010 and 2009 are as follows:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans > 90 Days and Accruing
December 31, 2010

Residential 1-4 Family	$	141	$	35	$	502	$	678	$	37,686	$	38,364	$	404
Commercial Real Estate and Multi Family	8,319		—		7,888		16,207		184,804		201,011		—
Agricultural Real Estate	—		—		1,372		1,372		19,535		20,907		—
Consumer	1		62		39		102		42,142		42,244		34
Commercial Operating	113		127		157		397		16,529		16,926		44
Agricultural Real Operating	—		—		—		—		28,107		28,107		—
Total	$	8,574	$	224	$	9,958	$	18,756	$	328,803	$	347,559	$	482

December 31, 2009

Residential 1-4 Family	$	206	$	62	$	261	$	529	$	46,408	$	46,937	$	—
Commercial Real Estate and Multi Family	—		7,519		12,755		20,274		209,629		229,903		—
Agricultural Real Estate	—		—		—		—		27,198		27,198		—
Consumer	69		59		9		137		82,863		83,000		—
Commercial Operating	300		41		520		861		20,838		21,699		—
Agricultural Real Operating	—		—		—		—		27,988		27,988		—
Total	$	575	$	7,681	$	13,545	$	21,801	$	414,924	$	436,725	$	—

Impaired loans as of December 31, 2010 and 2009 are as follows:

	Recorded Balance		Unpaid Principal Balance		Average Investment in Impaired Loans		Interest Income Recognized
December 31, 2010

Loans without a specific valuation allowance
Residential 1-4 Family	$	—	$	—	$	11	$	—
Commercial Real Estate and Multi Family	9,865		15,267		9,366		52
Agricultural Real Estate	1,803		1,803		987		—
Consumer	207		207		324		4
Commercial Operating	174		174		990		3
Agricultural Real Operating	—		—		69		—
Total	$	12,050	$	17,452	$	11,747	$	60

December 31, 2009

Loans without a specific valuation allowance
Residential 1-4 Family	$	22	$	22	$	156	$	—
Commercial Real Estate and Multi Family	12,726		14,411		12,479		49
Agricultural Real Estate	—		—		—		—
Consumer	287		287		199		2
Commercial Operating	1,614		1,614		2,669		5
Agricultural Real Operating	—		—		3,183		—
Total	$	14,648	$	16,333	$	18,686	$	56

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Troubled debt restructured loans as of December 31, 2010 and 2009 are as follows:

	December 31, 2010					December 31, 2009
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance

Residential 1-4 Family	—	$	—	$	—	—	$	—	$	—
Commercial Real Estate and Multi Family	2	396		396		—	—		—
Agricultural Real Estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Commercial Operating	—	—		—		—	—		—
Agricultural Real Operating	—	—		—		—	—		—

NOTE 3. ALLOWANCE FOR LOAN LOSSES

At December 31, 2010 the Company’s allowance for loan losses was $4.8 million, a decrease of $0.4 million from $5.2 million at September 30, 2010. Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Loss” in Management’s Discussion and Analysis.

The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Company and its borrowers operate.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses.

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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 and common stock share amounts used in the computation of basic and diluted EPS for the three months ended December 31, 2010 and 2009 is presented below.

Three Months Ended December 31,	2010			2009
(Dollars in Thousands, Except Share and Per Share Data)

Earnings
Net Income	$	721		$	1,192

Basic EPS
Weighted average common shares outstanding	3,111,898			2,637,091
Less weighted average unallocated ESOP and nonvested shares	(1,667		)	(3,334		)
Weighted average common shares outstanding	3,110,231			2,633,757

Earnings Per Common Share
Basic	$	0.23		$	0.45

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	3,110,231			2,633,757
Add dilutive effect of assumed exercises of stock options, net of tax benefits	—			40,447
Weighted average common and dilutive potential common shares outstanding	3,110,231			2,674,204

Earnings Per Common Share
Diluted	$	0.23		$	0.45

Stock options totaling 365,228 and 313,727 were not considered in computing diluted EPS for the three months ended December 31, 2010 and December 31, 2009, respectively, because they were not dilutive. The calculation of the diluted EPS for the three months ended December 31, 2010 does not reflect the assumed exercise of 11,944 stock options because the effect would have been anti-dilutive for the period.

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NOTE 5. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale securities as of December 31, 2010 and September 30, 2010 are presented below.

			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		(LOSSES)			VALUE
	(Dollars in Thousands)
December 31, 2010

Debt securities
Trust preferred and corporate securities	$	24,968	$	—	$	(7,581	)	$	17,387
Obligations of states and political subdivisions	4,562		101		(68		)	4,595
Mortgage-backed securities	490,240		8,739		(1,344		)	497,635
Total debt securities	$	519,770	$	8,840	$	(8,993	)	$	519,617

			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		(LOSSES)			VALUE
	(Dollars in Thousands)
September 30, 2010

Debt securities
Trust preferred and corporate securities	$	25,466	$	7	$	(7,922	)	$	17,551
Obligations of states and political subdivisions	3,769		155		(8		)	3,916
Mortgage-backed securities	475,026		10,671		(312		)	485,385
Total debt securities	$	504,261	$	10,833	$	(8,242	)	$	506,852

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at December 31, 2010 and September 30, 2010 are as follows:

	LESS THAN 12 MONTHS					OVER 12 MONTHS					TOTAL
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
December 31, 2010

Debt securities
Trust preferred and corporate securities	$	—	$	—		$	17,237	$	(7,581	)	$	17,237	$	(7,581	)
Obligations of states and political subdivisions	1,849		(68		)	—		—			$	1,849	$	(68	)
Mortgage-backed securities	134,778		(1,344		)	—		—			134,778		(1,344		)
Total debt securities	$	136,627	$	(1,412	)	$	17,237	$	(7,581	)	$