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 June 30, 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 incorporation or organization)		(I.R.S. Employer Identification No.)

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 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. (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 xNO

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 4, 2011:
Common Stock, $.01 par value		3,117,363 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

Part I. Financial Information		Page No.

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of Financial Condition as of June 30, 2011 and September 30, 2010	1

	Condensed Consolidated Statements of Operations for the Three And Nine Months Ended June 30, 2011 and 2010	2

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2011 and 2010	3

	Condensed Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended June 30, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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	32

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	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Removed and Reserved	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

Signatures		49

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

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

ASSETS	June 30, 2011			September 30, 2010

Cash and cash equivalents	$	65,210		$	87,503
Investment securities available for sale		27,017			21,467
Mortgage-backed securities available for sale		602,091			485,385
Loans receivable - net of allowance for loan losses of $4,882 at June 30, 2011 and $5,234 at September 30, 2010		312,328			366,045
Federal Home Loan Bank Stock, at cost		5,404			5,283
Accrued interest receivable		4,230			4,759
Bond insurance receivable		4,192			3,683
Premises, furniture, and equipment, net		17,742			19,377
Bank-owned life insurance		14,191			13,796
Foreclosed real estate and repossessed assets		2,460			1,295
Goodwill and intangible assets		1,408			2,663
MPS accounts receivable		6,881			8,085
Other assets		11,326			10,425

Total assets	$	1,074,480		$	1,029,766

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	730,896		$	675,163
Interest-bearing checking		33,899			29,976
Savings deposits		11,713			10,821
Money market deposits		34,827			35,422
Time certificates of deposit		117,254			146,072
Total deposits		928,589			897,454
Advances from Federal Home Loan Bank		21,000			22,000
Securities sold under agreements to repurchase		9,682			8,904
Subordinated debentures		10,310			10,310
Accrued interest payable		247			392
Contingent liability		4,015			3,983
Accrued expenses and other liabilities		22,573			14,679
Total liabilities		996,416			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 June 30, 2011 and September 30, 2010, respectively		34			34
Additional paid-in capital		32,432			32,381
Retained earnings - substantially restricted		43,707			42,475
Accumulated other comprehensive income		6,213			1,599
Treasury stock, 255,636 and 261,586 common shares, at cost, at June 30, 2011 and September 30, 2010, respectively		(4,322	)		(4,445	)
Total shareholders’ equity		78,064			72,044

Total liabilities and shareholders’ equity	$	1,074,480		$	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						Nine Months Ended
	June 30,						June 30,

	2011			2010			2011		2010

Interest and dividend income:
Loans receivable, including fees	$	4,538		$	5,523		$	14,894	$	19,624
Mortgage-backed securities		5,232			4,393			13,583		9,375
Other investments		210			198			703		562
		9,980			10,114			29,180		29,561
Interest expense:
Deposits		732			939			2,374		2,976
FHLB advances and other borrowings		421			517			1,284		1,607
		1,153			1,456			3,658		4,583

Net interest income		8,827			8,658			25,522		24,978

Provision for loan losses		(161	)		609			25		14,778

Net interest income after provision for loan losses		8,988			8,049			25,497		10,200

Non-interest income:
Card fees		8,272			18,206			40,738		74,866
Deposit fees		144			191			488		585
Bank-owned life insurance income		132			132			395		394
Loan fees		69			68			355		246
Gain on sale of securities available for sale, net		-			239			1,158		2,093
Other income		91			(43	)		350		283
Total non-interest income		8,708			18,793			43,484		78,467

Non-interest expense:
Compensation and benefits		7,158			7,500			23,142		25,032
Card processing expense		5,898			8,060			19,241		29,897
Occupancy and equipment expense		2,166			1,995			6,376		6,229
Legal and consulting expense		974			521			3,724		2,405
Marketing		251			384			923		1,593
Data processing expense		272			756			818		1,306
Goodwill impairment		-			-			1,508		-
Other expense		2,593			1,943			8,449		6,366
Total non-interest expense		19,312			21,159			64,181		72,828


Income (loss) before income tax expense (benefit)		(1,616	)		5,683			4,800		15,839

Income tax expense (benefit)		(596	)		2,145			2,352		5,935

Net income (loss)	$	(1,020	)	$	3,538		$	2,448	$	9,904

Earnings (loss) per common share:
Basic	$	(0.33	)	$	1.15		$	0.79	$	3.44
Diluted	$	(0.33	)	$	1.11		$	0.79	$	3.37

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					Nine Months Ended
	June 30,					June 30,

	2011			2010		2011		2010


Net income (loss)	$	(1,020	)	$	3,538	$	2,448	$	9,904

Other comprehensive income:
Change in net unrealized gains on securities available for sale		10,579			8,498		6,303		5,196
Gains realized in net income		-			239		1,158		2,093
		10,579			8,737		7,461		7,289
Deferred income tax effect		4,039			3,259		2,847		2,719
Total other comprehensive income		6,540			5,478		4,614		4,570
Total comprehensive income	$	5,520		$	9,016	$	7,062	$	14,474

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, 2011 and 2010

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

									Accumulated
									Other
			Additional						Comprehensive						Total
	Common		Paid-in			Retained			Income (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 ($.39 per share)		-		-			(1,142	)		-			-			(1,142	)

Issuance of 415,000 common shares from the sales of equity securities		4		8,563			-			-			-			8,567

Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options		-		(272	)		-			-			894			622

Stock compensation		-		(69	)		-			-			-			(69	)

Change in net unrealized losses on securities available for sale		-		-			-			4,570			-			4,570

Net income for nine months ended June 30, 2010		-		-			9,904			-			-			9,904

Balance, June 30, 2010	$	34	$	31,773		$	40,388		$	2,732		$	(5,130	)	$	69,797

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

Cash dividends declared on common stock ($.39 per share)		-		-			(1,216	)		-			-			(1,216	)

Issuance of 5,950 common shares from treasury stock due to issuance of restricted stock and exercise of stock options		-		(10	)		-			-			123			113

Stock compensation		-		61			-			-			-			61

Change in net unrealized losses on securities available for sale		-		-			-			4,614			-			4,614

Net income for nine months ended June 30, 2011		-		-			2,448			-			-			2,448

Balance, June 30, 2011	$	34	$	32,432		$	43,707		$	6,213		$	(4,322	)	$	78,064

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,
	2011			2010

Cash flows from operating activities:
Net income	$	2,448		$	9,904
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		7,427			8,716
Provision for loan losses		25			14,778
Gain on sale of securities available for sale, net		(1,158	)		(2,093	)
Net change in accrued interest receivable		529			(265	)
Goodwill impairment		1,508			-
Net change in other assets		(983	)		(1,575	)
Net change in accrued interest payable		(145	)		(129	)
Net change in accrued expenses and other liabilities		7,926			5,627
Net cash provided by operating activities		17,577			34,963

Cash flows from investing activities:
Purchase of securities available for sale		(259,896	)		(378,557	)
Net change in federal funds sold		-			9
Proceeds from sales of securities available for sale		46,238			93,359
Proceeds from maturities and principal repayments of
securities available for sale		95,460			156,327
Loans purchased		(1,039	)		(1,287	)
Net change in loans receivable		52,881			4,678
Proceeds from sales of foreclosed real estate		832			733
Net change in Federal Home Loan Bank stock		(121	)		(1,036	)
Purchase of premises and equipment		(1,249	)		(1,766	)
Other, net		(2,847	)		(2,719	)
Net cash used in investing activities		(69,741	)		(130,259	)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits		59,953			92,269
Net change in time deposits		(28,818	)		(4,511	)
Net change in advances from Federal Home Loan Bank		(1,000	)		9,200
Net change in securities sold under agreements to repurchase		778			1,616
Cash dividends paid		(1,216	)		(1,142	)
Proceeds from issuance of equity securities		-			8,567
Stock compensation		61			(69	)
Proceeds from exercise of stock options		113			622
Net cash provided by financing activities		29,871			106,552

Net increase (decrease) in cash and cash equivalents		(22,293	)		11,256

Cash and cash equivalents at beginning of period		87,503			6,168
Cash and cash equivalents at end of period	$	65,210		$	17,424

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	3,803		$	4,711
Income taxes		3,078			1,664

Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate	$	2,025		$	244

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 June 30, 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 June 30, 2011 is 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 June 30, 2011

Allowance for loan losses:
Beginning balance		$82			$3,448			$38			$48			$92			$68			$965			$4,741
Provision charged to expense		85			96			(38	)		(297	)		31			(3	)		(35	)		(161	)
Losses charged off		(37	)		-			-			(7	)		(29	)		-			-			(73	)
Recoveries		4			102			-			269			-			-			-			375
Ending balance		$134			$3,646			$-			$13			$94			$65			$930			$4,882

Nine Months Ended June 30, 2011

Allowance for loan losses:
Beginning balance		$50			$3,053			$111			$738			$131			$125			$1,026			$5,234
Provision charged to expense		159			506			(111	)		(379	)		6			(60	)		(96	)		25
Losses charged off		(79	)		(15	)		-			(764	)		(43	)		-			-			(901	)
Recoveries		4			102			-			418			-			-			-			524
Ending balance		$134			$3,646			$-			$13			$94			$65			$930			$4,882


Ending balance: individually evaluated for impairment		$31			$1,696			$-			$6			$54			$-			$-			$1,787
Ending balance: collectively evaluated for impairment		$103			$1,950			$-			$7			$40			$65			$930			$3,095
Ending balance: loans acquired with deteriorated credit quality		$-			$-			$-			$-			$-			$-			$-			$-

Loans:
Ending balance: individually evaluated for impairment		$336			$18,962			$19			$61			$313			$-			$-			$19,691
Ending balance: collectively evaluated for impairment		$34,303			$176,744			$16,093			$36,533			$15,485			$18,361			$-			$297,519
Ending balance: loans acquired with deteriorated credit quality		$-			$-			$-			$-			$-			$-			$-			$-

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

June 30, 2011
	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating

Pass	$	33,333	$	164,118	$	16,093	$	35,996	$	14,603	$	11,874
Watch		473		8,011		-		442		823		6,487
Special Mention		497		4,615		-		95		59		-
Substandard		336		16,456		19		59		281		-
Doubtful		-		2,506		-		2		32		-
	$	34,639	$	195,706	$	16,112	$	36,594	$	15,798	$	18,361

September 30, 2010
	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Business		Agricultural Operating

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”) and its successor, the Office of the Comptroller of the Currency (“OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the 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 June 30, 2011 and September 30, 2010 are as follows:

June 30, 2011	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

Residential 1-4 Family	$	405	$	173	$	257	$	835	$	33,804	$	34,639	$	80
Commercial Real Estate and Multi Family		793		838		13,596		15,227		180,479		195,706		-
Agricultural Real Estate		-		-		19		19		16,093		16,112		-
Consumer		4		-		7		11		36,583		36,594		7
Commercial Operating		1		-		32		33		15,765		15,798		-
Agricultural Real Operating		-		-		-		-		18,361		18,361		-
Total	$	1,203	$	1,011	$	13,911	$	16,125	$	301,085	$	317,210	$	87

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 June 30, 2011 and September 30, 2010 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
June 30, 2011

Loans without a specific valuation allowance
Residential 1-4 Family	$	970	$	970	$	-	$	692	$	50
Commercial Real Estate and Multi Family		12,626		12,626		-		18,297		169
Agricultural Real Estate		-		-		-		3,010		-
Consumer		536		536		-		380		45
Commercial Operating		882		882		-		825		12
Agricultural Real Operating		6,487		6,487		-		7,720		91
Total	$	21,501	$	21,501	$	-	$	30,924	$	367
Loans with a specific valuation allowance
Residential 1-4 Family	$	336	$	336	$	31	$	69	$	10
Commercial Real Estate and Multi Family		18,962		24,393		1,696		12,215		114
Agricultural Real Estate		19		19		-		1,255		-
Consumer		61		94		6		229		1
Commercial Operating		313		328		54		479		2
Agricultural Real Operating		-		-		-		69		-
Total	$	19,691	$	25,170	$	1,787	$	14,316	$	127


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 June 30, 2011 and September 30, 2010 are as follows:

	June 30, 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		3	$	329	$	329		1	$	45	$	45
Commercial Real Estate and Multi Family		5		3,883		3,883		2		377		377
Agricultural Real Estate		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Commercial Operating		2		39		54		-		-		-
Agricultural Real Operating		-		-		-		-		-		-

NOTE 3. ALLOWANCE FOR LOAN LOSSES

At June 30, 2011, the Company’s allowance for loan losses was $4.9 million, a decrease of $0.3 million from $5.2 million at September 30, 2010. During the nine months ended June 30, 2011 the Company recorded a provision for loan losses of $0.1 million.

During the nine months ended June 30, 2011, the Company recorded a retail bank provision in the amount of $0.4 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 June 30, 2011, the Company recorded a negative provision for loan losses in the amount of $0.2 million, consisting of a negative provision of $0.3 million related to the discontinuance of the MPS iAdvance loan program and a provision of $0.1 million primarily related to increases in non-performing loans. The Company’s total net charge-offs for the three and nine months ended June 30, 2011 were a net recovery of $0.3 million and a net charge-off of $0.4 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.