Edgar Filing: META FINANCIAL GROUP INC

form10q.htm

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, 2011

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 May 6, 2011:
Common Stock, $.01 par value	3,117,363 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 March 31, 2011 and September 30, 2010	1

	Condensed Consolidated Statements of Operations for the Three And Six Months Ended March 31, 2011 and 2010	2

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2011 and 2010	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	44

Item 4.	Controls and Procedures	46

Part II. Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Removed and Reserved	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

Signatures		48

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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)

ASSETS	March 31, 2011			September 30, 2010

Cash and cash equivalents	$	158,708		$	87,503
Investment securities available for sale		23,836			21,467
Mortgage-backed securities available for sale		601,953			485,385
Loans receivable - net of allowance for loan losses of $4,741 at March 31, 2011 and $5,234 at September 30, 2010		330,084			366,045
Federal Home Loan Bank Stock, at cost		5,194			5,283
Accrued interest receivable		4,447			4,759
Bond insurance receivable		4,192			3,683
Premises, furniture, and equipment, net		18,410			19,377
Bank-owned life insurance		14,059			13,796
Foreclosed real estate and repossessed assets		933			1,295
Goodwill and intangible assets		1,190			2,663
MPS accounts receivable		7,620			8,085
Other assets		12,777			10,425

Total assets	$	1,183,403		$	1,029,766

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	847,812		$	675,163
Interest-bearing checking		34,041			29,976
Savings deposits		11,517			10,821
Money market deposits		35,015			35,422
Time certificates of deposit		118,660			146,072
Total deposits		1,047,045			897,454
Advances from Federal Home Loan Bank		22,000			22,000
Securities sold under agreements to repurchase		11,787			8,904
Subordinated debentures		10,310			10,310
Accrued interest payable		241			392
Contingent liability		3,212			3,983
Accrued expenses and other liabilities		15,878			14,679
Total liabilities		1,110,473			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, 3,117,363 and 3,111,413 shares outstanding at March 31, 2011 and September 30, 2010, respectively		34			34
Additional paid-in capital		32,411			32,381
Retained earnings - substantially restricted		45,133			42,475
Accumulated other comprehensive income (loss)		(326	)		1,599
Treasury stock, 255,636 and 261,586 common shares, at cost, at March 31, 2011 and September 30, 2010, respectively		(4,322	)		(4,445	)
Total shareholders’ equity		72,930			72,044

Total liabilities and shareholders’ equity	$	1,183,403		$	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					Six Months Ended
	March 31,					March 31,

	2011		2010			2011		2010

Interest and dividend income:
Loans receivable, including fees	$	4,909	$	7,376		$	10,356	$	14,101
Mortgage-backed securities		4,433		2,827			8,351		4,982
Other investments		238		180			493		364
		9,580		10,383			19,200		19,447
Interest expense:
Deposits		753		949			1,642		2,037
FHLB advances and other borrowings		410		433			863		1,090
		1,163		1,382			2,505		3,127
Net interest income		8,417		9,001			16,695		16,320
Provision for loan losses		214		9,478			186		14,169

Net interest income after provision for loan losses		8,203		(477	)		16,509		2,151
Non-interest income:
Card fees		18,392		37,116			32,466		56,660
Gain on sale of securities available for sale, net		632		—			1,158		1,854
Deposit fees		163		190			344		394
Loan fees		85		65			286		178
Bank-owned life insurance income		130		132			263		262
Other income		68		133			259		326
Total non-interest income		19,470		37,636			34,776		59,674
Non-interest expense:
Compensation and benefits		8,188		8,861			15,984		17,532
Card processing expense		8,120		14,095			13,343		22,447
Occupancy and equipment expense		2,168		2,159			4,210		4,234
Legal and consulting expense		1,339		835			2,750		1,826
Goodwill impairment		—		—			1,508		—
Marketing		411		483			672		838
Data processing expense		273		177			546		369
Other expense		2,752		2,256			5,856		4,423
Total non-interest expense		23,251		28,866			44,869		51,669

Income before income tax expense		4,422		8,293			6,416		10,156
Income tax expense		1,675		3,119			2,948		3,790

Net income	$	2,747	$	5,174		$	3,468	$	6,366

Earnings per common share:
Basic	$	0.88	$	1.76		$	1.11	$	2.29
Diluted	$	0.88	$	1.74		$	1.11	$	2.26

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

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended					Six Months Ended
	March 31,					March 31,

	2011			2010		2011			2010

Net income	$	2,747		$	5,174	$	3,468		$	6,366

Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities available for sale		(1,006	)		1,525		(4,276	)		(3,301	)
Gains realized in net income		632			—		1,158			1,854
		(374	)		1,525		(3,118	)		(1,447	)
Deferred income tax effect		(145	)		569		(1,193	)		(539	)
Total other comprehensive income (loss)		(229	)		956		(1,925	)		(908	)
Total comprehensive income	$	2,518		$	6,130	$	1,543		$	5,458

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 Six Months Ended March 31, 2011 and 2010

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

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

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

Cash dividends declared on common stock ($.26 per share)		—		—			(741	)		—			—			(741	)

Issuance of 415,000 common shares from the sales of equity securities		4		8,571			—			—			—			8,575

Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options		—		(271	)		—			—			661			390

Stock compensation		—		91			—			—			—			91

Change in net unrealized losses on securities available for sale		—		—			—			(908	)		—			(908	)

Net income for six months ended March 31, 2010		—		—			6,366			—			—			6,366

Balance, March 31, 2010	$	34	$	31,942		$	37,251		$	(2,746	)	$	(5,363	)	$	61,118

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

Cash dividends declared on common stock ($.26 per share)		—		—			(810	)		—			—			(810	)

Issuance of 5,950 common shares from treasury stock due to issuance of restricted stock and exercise of stock options		—		(12	)		—			—			123			111

Stock compensation		—		42			—			—			—			42

Change in net unrealized losses on securities available for sale		—		—			—			(1,925	)		—			(1,925	)

Net income for six months ended March 31, 2011		—		—			3,468			—			—			3,468

Balance, March 31, 2011	$	34	$	32,411		$	45,133		$	(326	)	$	(4,322	)	$	72,930

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)

	Six Months Ended March 31,
	2011			2010

Cash flows from operating activities:
Net income	$	3,468		$	6,366
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		5,166			6,053
Provision for loan losses		186			14,169
Gain on sale of securities available for sale, net		(1,158	)		(1,854	)
Net change in accrued interest receivable		312			14
Goodwill impairment		1,508			—
Net change in other assets		(2,822	)		(9,028	)
Net change in accrued interest payable		(151	)		(109	)
Net change in accrued expenses and other liabilities		428			8,619
Net cash provided by operating activities		6,937			24,230

Cash flows from investing activities:
Purchase of securities available for sale		(238,464	)		(287,973	)
Net change in federal funds sold		—			9
Proceeds from sales of securities available for sale		46,239			38,401
Proceeds from maturities and principal repayments of securities available for sale		68,066			107,379
Loans purchased		(1,039	)		(392	)
Net change in loans receivable		36,960			(4,653	)
Proceeds from sales of foreclosed real estate		362			807
Net change in Federal Home Loan Bank stock		89			89
Proceeds from the sale of premises and equipment		—			—
Purchase of premises and equipment		(955	)		(1,199	)
Other, net		1,193			539
Net cash used in investing activities		(87,549	)		(146,993	)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits		177,003			146,962
Net change in time deposits		(27,412	)		(21,333	)
Net change in advances from Federal Home Loan Bank		—			(1,500	)
Net change in securities sold under agreements to repurchase		2,883			721
Cash dividends paid		(810	)		(741	)
Proceeds from issuance of equity securities		—			8,575
Stock compensation		42			91
Proceeds from exercise of stock options		111			390
Net cash provided by financing activities		151,817			133,165

Net increase in cash and cash equivalents		71,205			10,402

Cash and cash equivalents at beginning of period		87,503			6,168
Cash and cash equivalents at end of period	$	158,708		$	16,570

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	2,655		$	3,235
Income taxes		1,834			64

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 March 31, 2011, 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 at March 31, 2011 and September 30, 2010 are as follows:

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

Three Months Ended March 31, 2011

Allowance for loan losses:
Beginning balance	$	47		$	3,174		$	25		$	370		$	110		$	102		$	935		$	4,763
Provision charged to expense		76			274			13			(142	)		(3	)		(34	)		30			214
Losses charged off		(41	)		—			—			(258	)		(15	)		—			—			(314	)
Recoveries		—			—			—			78			—			—			—			78
Ending balance	$	82		$	3,448		$	38		$	48		$	92		$	68		$	965		$	4,741

Six Months Ended March 31, 2011

Allowance for loan losses:
Beginning balance	$	50		$	3,053		$	111		$	738		$	131		$	125		$	1,026		$	5,234
Provision charged to expense		73			410			(73	)		(82	)		(24	)		(57	)		(61	)		186
Losses charged off		(41	)		(15	)		—			(758	)		(15	)		—			—			(829	)
Recoveries		—			—			—			150			—			—			—			150
Ending balance	$	82		$	3,448		$	38		$	48		$	92		$	68		$	965		$	4,741

Ending balance: individually evaluated for impairment	$	—		$	1,410		$	14		$	39		$	69		$	—		$	—		$	1,532
Ending balance: collectively evaluated for impairment	$	82		$	2,038		$	24		$	9		$	23		$	68		$	965		$	3,209
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Loans:
Ending balance: individually evaluated for impairment	$	—		$	16,228		$	1,364		$	96		$	152		$	—		$	—		$	17,840
Ending balance: collectively evaluated for impairment	$	36,334		$	184,142		$	17,931		$	38,770		$	14,786		$	25,022		$	—		$	316,985
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

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The Asset Classification at March 31, 2011 and September 30, 2010 are as follows:

	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating
March 31, 2011
Pass	$	35,350	$	158,623	$	15,525	$	38,286	$	13,683	$	18,189
Watch		739		21,311		2,387		295		1,096		6,833
Special Mention		245		4,208		19		190		7		—
Substandard		—		14,428		1,363		56		119		—
Doubtful		—		1,800		—		39		34		—
	$	36,334	$	200,370	$	19,294	$	38,866	$	14,939	$	25,022

	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating
September 30, 2010
Pass	$	39,464	$	182,812	$	19,752	$	47,349	$	18,501	$	22,874
Watch		750		4,869		3,094		119		710		8,261
Special Mention		—		7,109		—		197		108		1,393
Substandard		—		8,081		3,050		259		390		—
Doubtful		—		1,949		—		189		—		—
	$	40,214	$	204,820	$	25,896	$	48,113	$	19,709	$	32,528

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 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.

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

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Consumer Lending- Meta Payment Systems (MPS). MPS offers credit products on a nationwide basis in the following 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. In portfolio lending, the Company retains some or all receivables and relies on the borrower as the underlying source of repayment.

Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.

The Company monitors concentrations of credit that 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.

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.

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When assets are classified as either substandard or doubtful, the Bank may establish general or specific 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 Bank’s 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.

Past due loans at March 31, 2011 and September 30, 2010 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
March 31, 2011
Residential 1-4 Family	$	57	$	128	$	187	$	372	$	35,962	$	36,334	$	80
Commercial Real Estate and Multi Family		773		—		15,427		16,200		184,170		200,370		7,540
Agricultural Real Estate		—		657		929		1,586		17,708		19,294		—
Consumer		13		16		43		72		38,794		38,866		43
Commercial Operating		—		—		61		61		14,878		14,939		—
Agricultural Real Operating		794		—		—		794		24,228		25,022		—
Total	$	1,637	$	801	$	16,647	$	19,085	$	315,740	$	334,825	$	7,663

September 30, 2010

Residential 1-4 Family	$	192	$	9	$	443	$	644	$	39,570	$	40,214	$	404
Commercial Real Estate and Multi Family		3,900		746		4,394		9,040		195,780		204,820		257
Agricultural Real Estate		—		—		2,196		2,196		23,700		25,896		—
Consumer		192		38		124		354		47,759		48,113		124
Commercial Operating		329		—		202		531		19,178		19,709		—
Agricultural Real Operating		—		—		400		400		32,128		32,528		—
Total	$	4,613	$	793	$	7,759	$	13,165	$	358,115	$	371,280	$	785

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Impaired loans at March 31, 2011 and September 30, 2010 are as follows:


	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
March 31, 2011

Loans without a specific valuation allowance
Residential 1-4 Family	$	1,219	$	1,219	$	—	$	597	$	126
Commercial Real Estate and Multi Family		25,500		25,500		—		18,285		303
Agricultural Real Estate		2,406		2,406		—		4,025		186
Consumer		485		485		—		359		5
Commercial Operating		887		887		—		775		12
Agricultural Real Operating		6,833		6,833		—		8,062		79
Total	$	37,330	$	37,330	$	—	$	32,103	$	711
Loans with a specific valuation allowance
Residential 1-4 Family	$	—	$	—	$	—	$	6	$	—
Commercial Real Estate and Multi Family		16,228		21,630		1,410		10,067		442
Agricultural Real Estate		1,364		1,364		14		1,259		—
Consumer		96		142		39		280		1
Commercial Operating		152		167		69		697		2
Agricultural Real Operating		—		—		—		69		—
Total	$	17,840	$	23,303	$	1,532	$	12,378	$	445

September 30, 2010

Loans without a specific valuation allowance
Residential 1-4 Family	$	849	$	849	$	—	$	510	$	101
Commercial Real Estate and Multi Family		11,878		11,878		—		13,419		166
Agricultural Real Estate		4,297		4,297		—		4,455		272
Consumer		316		316		—		512		3
Commercial Operating		818		818		—		1,175		6
Agricultural Real Operating		8,452		8,452		—		6,801		310
Total	$	26,610	$	26,610	$	—	$	26,872	$	858
Loans with a specific valuation allowance
Residential 1-4 Family	$	—	$	—	$	—	$	48	$	—
Commercial Real Estate and Multi Family		10,030		15,578		827		9,772		60
Agricultural Real Estate		3,050		3,050		81		626		—
Consumer		448		448		13		325		3
Commercial Operating		390		390		101		1,284		2
Agricultural Real Operating		—		—		—		1,140		—
Total	$	13,918	$	19,466	$	1,022	$	13,195	$	65

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Troubled debt restructured loans at March 31, 2011 and September 30, 2010 are as follows:

	March 31, 2011						September 30, 2010
	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		1	$	43	$	43		1	$	45	$	45
Commercial Real Estate and Multi Family		5		3,910		3,910		2		377		377
Agricultural Real Estate		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Commercial Operating		1		34		49		—		—		—
Agricultural Real Operating		—		—		—		—		—		—

NOTE 3. ALLOWANCE FOR LOAN LOSSES

At March 31, 2011, the Company’s allowance for loan losses was $4.7 million, a decrease of $0.5 million from $5.2 million at September 30, 2010. During the six months ended March 31, 2011 the Company recorded a provision for loan losses of $0.2 million.

During the six months ended March 31, 2011, the Company recorded a retail bank provision in the amount of $0.3 million due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans.

During the three months ended March 31, 2011, the Company recorded a provision for loan losses in the amount of $0.2 million, consisting of a negative provision of $0.1 million related to the discontinuance of the MPS iAdvance loan program and a provision of $0.3 million primarily related to increases in non-performing loans. The Company’s total net charge-offs for the three and six months ended March 31, 2011 were $0.2 million and $0.7 million, respectively. Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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.

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.

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A reconciliation of the income and common stock share amounts used in the computation of basic and diluted EPS for the three and six months ended March 31, 2011 and 2010 is presented below.

Three Months Ended March 31,	2011			2010
(Dollars in Thousands, Except Share and Per Share Data)

Earnings
Net Income	$	2,747		$	5,174

Basic EPS
Weighted average common shares outstanding		3,115,640			2,942,383
Less weighted average unallocated ESOP and nonvested shares		(1,667	)		(3,334	)
Weighted average common shares outstanding		3,113,973			2,939,049

Earnings Per Common Share
Basic	$	0.88		$	1.76

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share		3,113,973			2,939,049
Add dilutive effect of assumed exercises of stock options, net of tax benefits		1,896			33,710
Weighted average common and dilutive potential common shares outstanding		3,115,869			2,972,759

Earnings Per Common Share
Diluted	$	0.88		$	1.74

Six Months Ended March 31,	2011