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, 2012

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)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108

(Address of principal executive offices)

(605) 782-1767

(Registrant's telephone number, including area code)

121 East Fifth Street, Storm Lake, Iowa 50588

(Former name, former address and former fiscal year, if changed since last report)

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 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 August 13, 2012:
Common Stock, $.01 par value		3,846,617 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

			Page No.

Part I. Financial Information

	Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Statements of Financial Condition as of June 30, 2012 and September 30, 2011	1

		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2012 and 2011	2

		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2012 and 2011	3

		Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2012 and 2011	4

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	48

	Item 4.	Controls and Procedures	50

Part II. Other Information

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults Upon Senior Securities	51

	Item 4.	Mine Safety Disclosures	51

	Item 5.	Other Information	51

	Item 6.	Exhibits	51

	Signatures		52

Table of Contents

Item 1.

Financial Statements (Unaudited)

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

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

ASSETS	June 30, 2012			September 30, 2011

Cash and cash equivalents	$	166,435		$	276,893
Investment securities available for sale		152,503			28,330
Mortgage-backed securities available for sale		815,888			590,918
Loans receivable - net of allowance for loan losses of $4,426 at June 30, 2012 and $4,926 at September 30, 2011		332,948			314,410
Federal Home Loan Bank Stock, at cost		2,120			4,737
Accrued interest receivable		5,865			4,133
Insurance receivable		2,689			2,264
Premises, furniture, and equipment, net		18,072			17,168
Bank-owned life insurance		14,710			14,322
Foreclosed real estate and repossessed assets		861			2,671
Intangible assets		2,049			1,315
MPS accounts receivable		6,292			7,677
Other assets		8,250			10,643

Total assets	$	1,528,682		$	1,275,481

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	1,153,027		$	945,956
Interest-bearing checking		34,340			31,249
Savings deposits		24,435			11,136
Money market deposits		37,866			36,717
Time certificates of deposit		100,871			116,562
Total deposits		1,350,539			1,141,620
Advances from Federal Home Loan Bank		11,000			11,000
Securities sold under agreements to repurchase		27,314			8,055
Subordinated debentures		10,310			10,310
Accrued interest payable		216			223
Contingent liability		3,031			3,649
Accrued expenses and other liabilities		20,573			20,047
Total liabilities		1,422,983			1,194,904

STOCKHOLDERS’ EQUITY
Preferred stock, 800,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $.01 par value; 5,200,000 shares authorized at June 30,2012 and September 30, 2011, 4,012,999 and 3,372,999 shares issued and 3,846,617 and 3,146,867 shares outstanding at June 30, 2012and September 30, 2011, respectively		40			34
Additional paid-in capital		45,330			32,471
Retained earnings - substantially restricted		59,610			45,494
Accumulated other comprehensive income (loss)		3,508			6,336
Treasury stock, 166,382 and 226,132 common shares, at cost, at June 30, 2012 and September 30, 2011, respectively		(2,789	)		(3,758	)
Total stockholders’ equity		105,699			80,577

Total liabilities and stockholders’ equity	$	1,528,682		$	1,275,481

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,

	2012			2011			2012		2011

Interest and dividend income:
Loans receivable, including fees	$	4,615		$	4,538		$	13,647	$	14,894
Mortgage-backed securities		3,848			5,232			13,833		13,583
Other investments		686			210			1,583		703
		9,149			9,980			29,063		29,180
Interest expense:
Deposits		516			732			1,722		2,374
FHLB advances and other borrowings		341			421			1,000		1,284
		857			1,153			2,722		3,658

Net interest income		8,292			8,827			26,341		25,522

Provision (recovery) for loan losses		150			(161	)		1,049		25

Net interest income after provision for loan losses		8,142			8,988			25,292		25,497

Non-interest income:
Card fees		12,232			8,272			41,836		40,738
(Loss) gain on sale of securities available for sale, net		(401	)		-			12,030		1,158
Loan fees		358			69			977		355
Deposit fees		154			144			459		488
Bank-owned life insurance income		131			132			389		395
Other income		1,232			91			478		350
Total non-interest income		13,706			8,708			56,169		43,484

Non-interest expense:
Compensation and benefits		8,236			7,158			23,469		23,142
Card processing expense		3,672			5,898			13,970		19,241
Occupancy and equipment expense		2,083			2,166			6,269		6,376
Legal and consulting expense		861			974			4,146		3,724
Goodwill impairment		-			-			-		1,508
Marketing		317			251			809		923
Data processing expense		294			272			847		818
Other expense		2,608			2,593			7,565		8,449
Total non-interest expense		18,071			19,312			57,075		64,181


Income (loss) before income tax expense (benefit)		3,777			(1,616	)		24,386		4,800

Income tax expense (benefit)		1,390			(596	)		8,938		2,352

Net income (loss)	$	2,387		$	(1,020	)	$	15,448	$	2,448

Earnings (loss) per common share:
Basic	$	0.67		$	(0.33	)	$	4.66	$	0.79
Diluted	$	0.66		$	(0.33	)	$	4.64	$	0.79

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,

	2012		2011			2012			2011


Net income (loss)	$	2,387	$	(1,020	)	$	15,448		$	2,448

Other comprehensive loss:
Change in net unrealized gains on securities available for sale		5,440		10,579			7,449			8,619
Losses (gains) realized in net income		401		-			(12,030	)		(1,158	)
		5,841		10,579			(4,581	)		7,461
Deferred income tax effect		2,234		4,039			(1,753	)		2,847
Total other comprehensive income (loss)		3,607		6,540			(2,828	)		4,614
Total comprehensive income	$	5,994	$	5,520		$	12,620		$	7,062

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the Nine Months Ended June 30, 2012 and 2011

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

									Accumulated
			Additional						Other						Total
	Common		Paid-in			Retained			Comprehensive			Treasury			Stockholders’
	Stock		Capital			Earnings			Income (Loss)			Stock			Equity

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		-		(10	)		-			-			123			113

Stock compensation		-		61			-			-			-			61

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

Net income		-		-			2,448			-			-			2,448

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

Balance, September 30, 2011	$	34	$	32,471		$	45,494		$	6,336		$	(3,758	)	$	80,577

Cash dividends declared on common stock ($.39 per share)		-		-			(1,332	)		-			-			(1,332	)

Issuance of 640,000 common shares from the sales of equity securities		6		12,782			-			-			-			12,788

Issuance of 59,750 common shares from treasury stock due to issuance of restricted stock		-		50			-			-			969			1,019

Stock compensation		-		27			-			-			-			27

Change in net unrealized gains (losses) on securities available for sale		-		-			-			(2,828	)		-			(2,828	)

Net income		-		-			15,448			-			-			15,448

Balance, June 30, 2012	$	40	$	45,330		$	59,610		$	3,508		$	(2,789	)	$	105,699

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,
	2012			2011

Cash flows from operating activities:
Net income	$	15,448		$	2,448
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		13,876			7,427
Disbursement of non-real estate consumer loans originated for sale		(617,928	)		(693,486	)
Proceeds from sale of non-real estate consumer loans		617,806			691,197
Disbursement of 1-4 family residential mortgage loans originated for sale		-			(2,074	)
Proceeds from sale of 1-4 family residential mortgage loans		368			3,515
Loss (gain) on sale of loans		7			(175	)
Provision for loan losses		1,049			25
Gain on sale of other assets		(166	)		-
Gain on sale of securities available for sale, net		(12,030	)		(1,158	)
Net change in accrued interest receivable		(1,732	)		529
Goodwill impairment		-			1,508
Net change in other assets		2,332			(983	)
Net change in accrued interest payable		(7	)		(145	)
Net change in accrued expenses and other liabilities		(92	)		7,926
Net cash provided by operating activities		18,931			16,554

Cash flow from investing activities:
Purchase of securities available for sale		(898,546	)		(259,896	)
Proceeds from sales of securities available for sale		386,859			46,238
Proceeds from maturities and principal repayments of securities available for sale		158,738			95,460
Loans purchased		(6,320	)		(1,039	)
Net change in loans receivable		(16,560	)		53,904
Proceeds from sales of foreclosed real estate		4,919			832
Federal Home Loan Bank stock purchases		(58,331	)		-
Federal Home Loan Bank stock redemptions		60,948			(121	)
Proceeds from the sale of premises and equipment		24			-
Purchase of premises and equipment		(3,554	)		(1,249	)
Other, net		1,754			(2,847	)
Net cash used in investing activities		(370,069	)		(68,718	)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits		224,610			59,953
Net change in time deposits		(15,691	)		(28,818	)
Net change in advances from Federal Home Loan Bank		-			(1,000	)
Net change in securities sold under agreements to repurchase		19,259			778
Cash dividends paid		(1,332	)		(1,216	)
Proceeds from issuance of common shares, net of issuance costs		12,788			-
Stock compensation		27			61
Proceeds from exercise of stock options		1,019			113
Net cash provided by financing activities		240,680			29,871

Net change in cash and cash equivalents		(110,458	)		(22,293	)

Cash and cash equivalents at beginning of period		276,893			87,503
Cash and cash equivalents at end of period	$	166,435		$	65,210

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	2,729		$	3,803
Income taxes		5,624			3,078

Supplemental schedule of non-cash investing activities:
Loans transferred to foreclosed real estate	$	3,040		$	2,025

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, 2011 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 20, 2011. 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, 2012, are not necessarily indicative of the results expected for the year ending September 30, 2012.

NOTE 2.

CREDIT DISCLOSURES

Loans are considered impaired if full principal or interest payments are not probable in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent.

The allowance consists of specific, general, and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The general component covers loans not considered impaired and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, manufactured homes, home equity and second mortgage loans. Commercial and agricultural loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or more. Generally, non-accrual loans are considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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Loan receivables at June 30, 2012 and September 30, 2011 are as follows:

	June 30, 2012			September 30, 2011
	(Dollars in Thousands)

One to four family residential mortgage loans	$	43,973		$	33,753
One to four family residential mortgage loans held for sale		-			375
Commercial and multi-family real estate loans		191,415			194,414
Agricultural real estate loans		20,572			20,320
Consumer loans		39,059			32,418
Consumer loans held for sale		2,306			1,980
Commercial operating loans		15,023			14,955
Agricultural operating loans		25,132			21,200
Total Loans Receivable		337,480			319,415

Less:
Allowance for loan losses		(4,426	)		(4,926	)
Net deferred loan origination fees		(106	)		(79	)
Total Loans Receivable, Net	$	332,948		$	314,410

Activity in the allowance for loan losses for the three and nine month periods ended June 30, 2012 and 2011 is as follows:

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
(Dollars in Thousands)	2012			2011			2012			2011


Beginning balance	$	4,762		$	4,741		$	4,926		$	5,234
Provision (recovery) for loan losses		150			(161	)		1,049			25
Loan charge offs		(506	)		(73	)		(1,577	)		(901	)
Recoveries		20			375			28			524
Ending balance	$	4,426		$	4,882		$	4,426		$	4,882

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Allowance for loan losses and loans receivable for the three and nine month periods ended June 30, 2012 and 2011 is as follows:

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

Three Months Ended June 30, 2012

Allowance for loan losses:
Beginning balance	$	147		$	3,975		$	-	$	27		$	37		$	-		$	576		$	4,762
Provision (recovery) for loan losses		17			182			-		(12	)		(1	)		-			(36	)		150
Loan charge offs		-			(502	)		-		(4	)		-			-			-			(506	)
Recoveries		-			20			-		-			-			-			-			20
Ending balance	$	164		$	3,675		$	-	$	11		$	36		$	-		$	540		$	4,426

Nine Months Ended June 30, 2012

Allowance for loan losses:
Beginning balance	$	165		$	3,901		$	-	$	16		$	36		$	67		$	741		$	4,926
Provision (recovery) for loan losses		1			1,322			-		(3	)		(3	)		(67	)		(201	)		1,049
Loan charge offs		(3	)		(1,568	)		-		(6	)		-			-			-			(1,577	)
Recoveries		1			20			-		4			3			-			-			28
Ending balance	$	164		$	3,675		$	-	$	11		$	36		$	-		$	540		$	4,426


Ending balance: individually evaluated for impairment	$	4		$	1,157		$	-	$	-		$	2		$	-		$	-		$	1,163
Ending balance: collectively evaluated for impairment	$	160		$	2,518		$	-	$	11		$	34		$	-		$	540		$	3,263

Loans:
Ending balance: individually evaluated for impairment	$	78		$	10,830		$	-	$	1		$	78		$	-		$	-		$	10,987
Ending balance: collectively evaluated for impairment	$	43,895		$	180,585		$	20,572	$	39,058		$	14,945		$	25,132		$	-		$	324,187

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	1-4 Family Residential			Commercial and Multi Family Real Estate			Agricultural Real Estate			Consumer			Commercial Operating			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 (recovery) for loan losses		85			96			(38	)		(297	)		31			(3	)		(35	)		(161	)
Loan charge offs		(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 (recovery) for loan losses		159			506			(111	)		(379	)		6			(60	)		(96	)		25
Loan charge offs		(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	$	26		$	1,665		$	-		$	-		$	3		$	-		$	-		$	1,694
Ending balance: collectively evaluated for impairment	$	108		$	1,981		$	-		$	13		$	91		$	65		$	930		$	3,188

Loans:
Ending balance: individually evaluated for impairment	$	219		$	17,480		$	19		$	-		$	64		$	-		$	-		$	17,782
Ending balance: collectively evaluated for impairment	$	34,420		$	178,226		$	16,093		$	36,594		$	15,734		$	18,361		$	-		$	299,428

Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by our regulator, the Office of the Comptroller of the Currency (the “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.

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,” MetaBank (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 its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.

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The asset classification of loans at June 30, 2012 and September 30, 2011, which excludes loans held for sale, are as follows:

June 30, 2012
	1-4 Family Residential		Commercial and Multi Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Total

Pass	$	43,512	$	166,263	$	20,572	$	38,832	$	14,405	$	25,132	$	308,716
Watch		356		12,642		-		95		360		-		13,453
Special Mention		-		700		-		51		238		-		989
Substandard		105		11,810		-		51		20		-		11,986
Doubtful		-		-		-		30		-		-		30
	$	43,973	$	191,415	$	20,572	$	39,059	$	15,023	$	25,132	$	335,174

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

Pass	$	33,830	$	161,109	$	20,320	$	31,967	$	13,737	$	14,500	$	275,463
Watch		281		10,446		-		318		913		6,700		18,658
Special Mention		17		3,006		-		38		53		-		3,114
Substandard		-		19,827		-		60		252		-		20,139
Doubtful		-		26		-		35		-		-		61
	$	34,128	$	194,414	$	20,320	$	32,418	$	14,955	$	21,200	$	317,435

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 adjustable rate mortgage (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 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 less attractive to customers and very few are currently being 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. Properties securing real estate loans made by the Company are appraised by independent 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, in order to supplement its loan portfolio, from time to time purchases 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 10 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.

Management believes that various levels of drought weather conditions within our markets has the potential to negatively impact potential yields which would have a negative economic effect on our agricultural markets in fiscal 2012.

Consumer Lending- Retail Bank. The “Retail Bank” (generally referring to traditional banking operations in our four market areas) 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.

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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.

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.

The Company will discontinue four of its credit sponsorship lending programs by the fourth fiscal quarter of 2012. For the year ended September 30, 2011 and the nine months ended June 30, 2012, these relationships provided approximately $3.4 million and $2.6 million, respectively, in total revenue (interest income plus non-interest income) to the Company. The Company believes that other sources of revenue from other developing non-sponsorship credit programs will eventually offset income that had been attributable to these relationships.

Commercial Operating Lending. The Company also originates commercial operating loans. Most of the Company’s commercial operating 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 operating 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.

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 operating 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 operating 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 operating 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 operating loans have been a declining percentage of the Company’s loan portfolio since 2005.

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Generally, when a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result of this action, previously accrued interest income on the loan is reversed against interest income. The loan will remain on non-accrual status until the loan has been brought current or until other circumstances occur that provide adequate assurance of full repayment of interest and principal.

Past due loans at June 30, 2012 and September 30, 2011 are as follows:

June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Non-Accrual Loans		Total Loans Receivable

Residential 1-4 Family	$	484	$	257	$	-	$	741	$	43,170	$	62	$	43,973
Commercial Real Estate and Multi Family		-		-		-		-		186,651		4,764		191,415
Agricultural Real Estate		-		-		-		-		20,572		-		20,572
Consumer		20		59		64		143		38,916		-		39,059
Commercial Operating		360		-		-		360		14,643		20		15,023
Agricultural Operating		-		-		-		-		25,132		-		25,132
Total	$	864	$	316	$	64	$	1,244	$	329,084	$	4,846	$	335,174

September 30, 2011

Residential 1-4 Family	$	51	$	30	$	-	$	81	$	33,920	$	127	$	34,128
Commercial Real Estate and Multi Family		2,460		-		-		2,460		178,929		13,025		194,414
Agricultural Real Estate		-		-		-		-		20,320		-		20,320
Consumer		26		14		24		64		32,354		-		32,418
Commercial Operating		-