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 December 31, 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 incorporation or organization)	(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108

(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 x NO

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

Class:	Outstanding at February 5, 2013:
Common Stock, $.01 par value	5,488,989 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

			Page No.

PART I - FINANCIAL INFORMATION			1

	Item 1.	Financial Statements (Unaudited)	1

		Condensed Consolidated Statements of Financial Condition as of December 31, 2012 and September 30, 2012	1

		Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2012 and 2011	2

		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011	3

		Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Three Months Ended December 31, 2012 and 2011	4

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 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	29

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	39

	Item 4.	Controls and Procedures	40

PART II - OTHER INFORMATION			42

	Item 1.	Legal Proceedings	42

	Item 1A.	Risk Factors	42

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 3.	Defaults Upon Senior Securities	43

	Item 4.	Mine Safety Disclosures	43

	Item 5.	Other Information	43

	Item 6.	Exhibits	43

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition (Unaudited)

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

ASSETS	December 31, 2012			September 30, 2012

Cash and cash equivalents	$	32,745		$	145,051
Investment securities available for sale		565,037			435,250
Mortgage-backed securities available for sale		758,955			681,442
Loans receivable - net of allowance for loan losses of $3,963 at December 31, 2012 and $3,971 at September 30, 2012		317,258			326,981
Federal Home Loan Bank Stock, at cost		11,375			2,120
Accrued interest receivable		8,800			6,710
Insurance receivable		539			581
Premises, furniture, and equipment, net		17,661			17,738
Bank-owned life insurance		32,957			14,832
Foreclosed real estate and repossessed assets		9			838
Intangible assets		2,185			2,035
MPS accounts receivable		6,077			5,763
Other assets		9,672			9,557

Total assets	$	1,763,270		$	1,648,898

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	1,132,218		$	1,181,299
Interest-bearing checking		32,709			33,094
Savings deposits		26,598			26,053
Money market deposits		39,750			38,585
Time certificates of deposit		84,983			100,763
Total deposits		1,316,258			1,379,794
Advances from Federal Home Loan Bank		11,000			11,000
Federal funds purchased		208,000			-
Securities sold under agreements to repurchase		12,303			26,400
Subordinated debentures		10,310			10,310
Accrued interest payable		218			177
Contingent liability		331			1,719
Accrued expenses and other liabilities		58,856			73,639
Total liabilities		1,617,276			1,503,039

STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2012 and September 30, 2012, respectively		-			-
Common stock, $.01 par value; 10,000,000 shares authorized, 5,576,099 and 5,576,099 shares issued, 5,481,727 and 5,443,881 shares outstanding at December 31, 2012 and September 30, 2012, respectively		56			56
Additional paid-in capital		78,760			78,769
Retained earnings - substantially restricted		63,189			60,776
Accumulated other comprehensive income		5,551			8,513
Treasury stock, 94,372 and 132,218 common shares, at cost, at December 31, 2012 and September 30, 2012, respectively		(1,562	)		(2,255	)
Total stockholders’ equity		145,994			145,859

Total liabilities and stockholders’ equity	$	1,763,270		$	1,648,898

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended
	December 31,

	2012			2011

Interest and dividend income:
Loans receivable, including fees	$	4,127		$	4,540
Mortgage-backed securities		2,934			4,787
Other investments		2,569			288
		9,630			9,615
Interest expense:
Deposits		425			653
FHLB advances and other borrowings		408			324
		833			977

Net interest income		8,797			8,638

Provision for loan losses		-			699

Net interest income after provision for loan losses		8,797			7,939

Non-interest income:
Card fees		11,536			13,913
Gain on sale of securities available for sale, net		1,654			1,050
Loan fees		268			329
Deposit fees		168			162
Bank-owned life insurance income		125			128
Loss on sale of foreclosed real estate		(400	)		-
Other income		59			100
Total non-interest income		13,410			15,682

Non-interest expense:
Compensation and benefits		8,277			7,176
Card processing expense		3,685			5,322
Occupancy and equipment expense		2,021			2,098
Legal and consulting expense		920			1,266
Data processing expense		320			275
Marketing		270			167
Other expense		2,585			2,487
Total non-interest expense		18,078			18,791


Income before income tax expense		4,129			4,830

Income tax expense		1,004			1,739

Net income	$	3,125		$	3,091

Earnings per common share:
Basic	$	0.57		$	0.97
Diluted	$	0.57		$	0.97

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
	December 31,

	2012			2011


Net income	$	3,125		$	3,091

Other comprehensive income (loss):
Change in net unrealized gain (loss) on securities available for sale		(3,143	)		3,504
Gains realized in net income		(1,654	)		(1,050	)
		(4,797	)		2,454
Deferred income tax effect		(1,835	)		938
Total other comprehensive income (loss)		(2,962	)		1,516
Total comprehensive income	$	163		$	4,607

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 Three Months Ended December 31, 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, 2011	$	34	$	32,471		$	45,494		$	6,336		$	(3,758	)	$	80,577

Cash dividends declared on common stock ($.13 per share)		-		-			(415	)		-			-			(415	)

Issuance of 44,398 common shares from treasury stock due to issuance of restricted stock		-		51			-			-			725			776

Stock compensation		-		13			-			-			-			13

Change in net unrealized gains (losses) on securities available for sale		-		-			-			1,516			-			1,516

Net income		-		-			3,091			-			-			3,091

Balance, December 31, 2011	$	34	$	32,535		$	48,170		$	7,852		$	(3,033	)	$	85,558


Balance, September 30, 2012	$	56	$	78,769		$	60,776		$	8,513		$	(2,255	)	$	145,859

Cash dividends declared on common stock ($.13 per share)		-		-			(712	)		-			-			(712	)

Issuance of common shares from the sales of equity securities		-		(62	)		-			-			-			(62	)

Issuance of 37,846 common shares from treasury stock due to issuance of restricted stock		-		48			-			-			693			741

Stock compensation		-		5			-			-			-			5

Change in net unrealized gains (losses) on securities available for sale		-		-			-			(2,962	)		-			(2,962	)

Net income		-		-			3,125			-			-			3,125

Balance, December 31, 2012	$	56	$	78,760		$	63,189		$	5,551		$	(1,562	)	$	145,994

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended December 31,
	2012			2011

Cash flows from operating activities:
Net income	$	3,125		$	3,091
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net		5,057			2,864
Disbursement of non-real estate consumer loans originated for sale		-			(304,066	)
Proceeds from sale of non-real estate consumer loans		-			304,717
Proceeds from sale of 1-4 family residential mortgage loans		-			373
Loss on sale of loans		-			2
Provision for loan losses		-			699
Gain on other assets		(7	)		(13	)
Gain on sale of securities available for sale, net		(1,654	)		(1,050	)
Net change in accrued interest receivable		(2,090	)		(309	)
Net change in other assets		(257	)		812
Net change in accrued interest payable		41			(16	)
Net change in accrued expenses and other liabilities		(16,171	)		(3,813	)
Net cash provided by (used in) operating activities		(11,956	)		3,291

Cash flow from investing activities:
Purchase of securities available for sale		(363,998	)		(277,388	)
Proceeds from sales of securities available for sale		110,516			45,595
Proceeds from maturities and principal repayments of
securities available for sale		38,783			39,738
Purchase of bank owned life insurance		(18,000	)		-
Loans purchased		(1,075	)		(4,188	)
Net change in loans receivable		10,798			(2,651	)
Proceeds from sales of foreclosed real estate		427			350
Federal Home Loan Bank stock purchases		(116,901	)		(6,007	)
Federal Home Loan Bank stock redemptions		107,646			-
Proceeds from the sale of premises and equipment		5			30
Purchase of premises and equipment		(725	)		(789	)
Other, net		1,835			(938	)
Net cash provided by (used in) investing activities		(230,689	)		(206,248	)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits		(47,756	)		93,065
Net change in time deposits		(15,780	)		(9,889	)
Net change in federal funds purchased		208,000			-
Net change in securities sold under agreements to repurchase		(14,097	)		(604	)
Cash dividends paid		(712	)		(415	)
Stock compensation		5			13
Proceeds from issuance of common stock		679			776
Net cash provided by (used in) financing activities		130,339			82,946

Net change in cash and cash equivalents		(112,306	)		(120,011	)

Cash and cash equivalents at beginning of period		145,051			276,893
Cash and cash equivalents at end of period	$	32,745		$	156,882

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	793		$	993
Income taxes		3,315			1,442

Supplemental schedule of non-cash investing activities:
Loans transferred to foreclosed real estate	$	-		$	1,720

See Notes to Condensed Consolidated Financial Statements.

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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, 2012 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 21, 2012. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended December 31, 2012, are not necessarily indicative of the results expected for the year ending September 30, 2013.

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 collectively evaluated for impairment. 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. Generally, non-accrual loans are considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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Loans receivable at December 31, 2012 and September 30, 2012 are as follows:

	December 31, 2012			September 30, 2012
	(Dollars in Thousands)

One to four family residential mortgage loans	$	55,964		$	49,134
Commercial and multi-family real estate loans		176,884			191,905
Agricultural real estate loans		23,446			19,861
Consumer loans		30,736			32,838
Commercial operating loans		13,569			16,452
Agricultural operating loans		20,926			20,981
Total Loans Receivable		321,525			331,171

Less:
Allowance for loan losses		(3,963	)		(3,971	)
Net deferred loan origination fees		(304	)		(219	)
Total Loans Receivable, Net	$	317,258		$	326,981

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three month periods ended December 31, 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 December 31, 2012

Allowance for loan losses:
Beginning balance	$	193		$	3,113		$	1	$	3	$	49	$	-	$	612	$	3,971
Provision (recovery) for loan losses		(5	)		(235	)		-		-		1		18		221		-
Loan charge offs		-			(8	)		-		-		-		-		-		(8	)
Recoveries		-			-			-		-		-		-		-		-
Ending balance	$	188		$	2,870		$	1	$	3	$	50	$	18	$	833	$	3,963


Ending balance: individually evaluated for impairment	$	10		$	443		$	-	$	-	$	-	$	-	$	-	$	453
Ending balance: collectively evaluated for impairment	$	178		$	2,427		$	1	$	3	$	50	$	18	$	833	$	3,510

Loans:
Ending balance: individually evaluated for impairment	$	351		$	8,798		$	-	$	-	$	16	$	-	$	-	$	9,165
Ending balance: collectively evaluated for impairment	$	55,613		$	168,086		$	23,446	$	30,736	$	13,553	$	20,926	$	-	$	312,360

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

Three Months Ended December 31, 2011

Allowance for loan losses:
Beginning balance	$	165	$	3,901		$	-	$	16		$	36		$	67		$	741		$	4,926
Provision (recovery) for loan losses		15		775			-		3			(2	)		(2	)		(90	)		699
Loan charge offs		-		(1,067	)		-		(2	)		-			-			-			(1,069	)
Recoveries		1		-			-		4			4			-			-			9
Ending balance	$	181	$	3,609		$	-	$	21		$	38		$	65		$	651		$	4,565

Ending balance: individually evaluated for impairment	$	11	$	1,425		$	-	$	-		$	3		$	-		$	-		$	1,439
Ending balance: collectively evaluated for impairment	$	170	$	2,184		$	-	$	21		$	35		$	65		$	651		$	3,126

Loans:
Ending balance: individually evaluated for impairment	$	178	$	14,608		$	-	$	-		$	91		$	-		$	-		$	14,877
Ending balance: collectively evaluated for impairment	$	37,328	$	179,836		$	20,070	$	34,359		$	12,549		$	22,071		$	-		$	306,213

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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 direct management to establish additional general or specific loss allowances.

The asset classification of loans at December 31, 2012 and September 30, 2012 are as follows:

December 31, 2012
	1-4 Family Residential		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Total

Pass	$	55,431	$	152,721	$	23,373	$	30,736	$	13,154	$	19,126	$	294,541
Watch		193		10,097		73		-		-		1,800		12,163
Special Mention		15		3,809		-		-		399		-		4,223
Substandard		295		10,257		-		-		16		-		10,568
Doubtful		30		-		-		-		-		-		30
	$	55,964	$	176,884	$	23,446	$	30,736	$	13,569	$	20,926	$	321,525

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

Pass	$	48,566	$	167,697	$	19,783	$	32,837	$	16,036	$	20,981	$	305,900
Watch		228		12,932		78		-		-		-		13,238
Special Mention		15		3,730		-		-		399		-		4,144
Substandard		295		7,546		-		1		17		-		7,859
Doubtful		30		-		-		-		-		-		30
	$	49,134	$	191,905	$	19,861	$	32,838	$	16,452	$	20,981	$	331,171

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 adjustable rate mortgage (“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 at the time of origination. 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.

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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 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 relatively unattractive to customers.

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. 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, 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 are underwritten with terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property at the time of origination, 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. 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.

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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 15 to 30 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 twenty years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.

Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one- to four-family residential lending. 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 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 futures 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 for the borrower 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 2013.

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 a direct 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, may be up to 90% 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. 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.

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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 Bank 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 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 portfolio lending on a nationwide basis. 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 which 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 discontinued four of its credit sponsorship lending programs in the fourth fiscal quarter of 2012. For the year ended September 30, 2012, these relationships provided approximately $2.6 million in total revenue (interest income plus non-interest income) to the Company. For the three months ended December 31, 2012, the Company did not receive any revenue for these credit sponsorship lending programs.

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 current income. The loan will remain on a 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 December 31, 2012 and September 30, 2012 are as follows:

December 31, 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	$	20	$	-	$	-	$	20	$	55,637	$	307	$	55,964
Commercial Real Estate and Multi-Family		-		-		-		-		175,463		1,421		176,884
Agricultural Real Estate		-		-		-		-		23,446		-		23,446
Consumer		186		19		14		219		30,517		-		30,736
Commercial Operating		-		-		-		-		13,553		16		13,569
Agricultural Operating		-		-		-		-		20,926		-		20,926
Total	$	206	$	19	$	14	$	239	$	319,542	$	1,744	$	321,525

September 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	$	-	$	-	$	-	$	-	$	48,827	$	307	$	49,134
Commercial Real Estate and Multi-Family		-		-		-		-		190,482		1,423		191,905
Agricultural Real Estate		-		-		-		-		19,861		-		19,861
Consumer		21		16		63		100		32,738		-		32,838
Commercial Operating		-		-		-		-		16,434		18		16,452
Agricultural Operating		-		-		-		-		20,981		-		20,981
Total	$	21	$	16	$	63	$	100	$	329,323	$	1,748	$	331,171

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Impaired loans at December 31, 2012 and September 30, 2012 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
December 31, 2012

Loans without a specific valuation allowance
Residential 1-4 Family	$	245	$	245	$	-
Commercial Real Estate and Multi-Family		3,949		3,949		-
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		16		31		-
Agricultural Operating		-		-		-
Total	$	4,210	$	4,225	$	-
Loans with a specific valuation allowance
Residential 1-4 Family	$	106	$	147	$	10
Commercial Real Estate and Multi-Family		4,849		8,741		443
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		-		-		-
Agricultural Operating		-		-		-
Total	$	4,955	$	8,888	$	453

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2012

Loans without a specific valuation allowance
Residential 1-4 Family	$	-	$	-	$	-
Commercial Real Estate and Multi-Family		-		-		-
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		-		-		-
Agricultural Operating		-		-		-
Total	$	-	$	-	$	-
Loans with a specific valuation allowance
Residential 1-4 Family	$	352	$	393	$	16
Commercial Real Estate and Multi-Family		8,815		12,707		346
Agricultural Real Estate		-		-		-
Consumer		1		1		-
Commercial Operating		17		32		1
Agricultural Operating		-		-		-
Total	$	9,185	$	13,133	$	363

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The following table provides the average recorded investment in impaired loans for the three month periods ended December 31, 2012 and 2011.

	Three Months Ended December 31,
	2012		2011
	Average Recorded Investment		Average Recorded Investment


Residential 1-4 Family	$	446	$	145
Commercial Real Estate and Multi-Family		8,969		11,401
Agricultural Real Estate		-		646
Consumer		1		11
Commercial Operating		34		78
Agricultural Operating		-		-
Total	$	9,450	$	12,281

The Company’s troubled debt restructurings (“TDR”), typically involve forgiving a portion of interest or principal on existing loans or making loans at a rate materially less than current market rates. Loans modified in a TDR during the three month periods ended December 31, 2012 and 2011 are as follows:

December 31, 2012

December 31, 2011

Number of Loans

Pre-Modification

Outstanding

Recorded Balance

Post-Modification

Outstanding

Recorded Balance

Number of

Loans

Pre-Modification

Outstanding

Recorded Balance

Post-Modification

Outstanding

Recorded Balance

Residential 1-4 Family

Commercial Real Estate and Multi-Family

Agricultural Real Estate

Consumer

Commercial Operating

Agricultural Operating

Total

The following table provides information on TDR loans for which there was a payment default during the three month periods ended December 31, 2012 and 2011, that had been modified during the 12-month period prior to the default:

During the Three Months Ended

December 31, 2012

December 31, 2011

Number of Loans

Recorded Investment

Number of Loans

Recorded Investment

Residential 1-4 Family

Commercial Real Estate and Multi Family

Agricultural Real Estate

Consumer

Commercial Operating

Agricultural Operating

Total

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NOTE 3.

ALLOWANCE FOR LOAN LOSSES

During the three months ended December 31, 2012, the Company did not record a provision for loan loss, as the Company’s analysis indicated the balance in the allowance for loan losses reflected probable losses in the loan portfolio. Further provisions were not considered necessary during the three months ended December 31, 2012, because the Company’s total net charge-offs for the three months ended December 31, 2012 were $8,000 and there were no adverse developments in the loan portfolio requiring additional provision. As a result, at December 31, 2012, the Company’s allowance for loan losses remained at $4.0 million.

The allowance for loan losses represents management’s estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.

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, non-performing loans, TDR 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 stockholders (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. Allocated ESOP shares are considered outstanding for earnings per common share calculations as they are committed to be issued; unallocated ESOP shares are not considered outstanding. All ESOP shares were allocated as of December 31, 2012. 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 months ended December 31, 2012 and 2011 is presented below.

Three Months Ended December 31,	2012		2011
(Dollars in Thousands, Except Share and Per Share Data)

Earnings
Net Income	$	3,125	$	3,091

Basic EPS
Weighted average common shares outstanding		5,462,154		3,177,570
Less weighted average unallocated ESOP and nonvested shares		-		-
Weighted average common shares outstanding		5,462,154		3,177,570

Earnings Per Common Share
Basic	$	0.57	$	0.97

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share		5,462,154		3,177,570
Add dilutive effect of assumed exercises of stock options, net of tax benefits		36,346		3,061
Weighted average common and dilutive potential common shares outstanding		5,498,500		3,180,631