Edgar Filing: META FINANCIAL GROUP INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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). YES o NO x

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

Class:		Outstanding at May 1, 2013:
Common Stock, $.01 par value		5,497,914 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

PART I - FINANCIAL INFORMATION			1

	Item 1.	Financial Statements	1

		Condensed Consolidated Statements of Financial Condition as of March 31, 2013 and September 30, 2012	1

		Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2013 and 2012	2

		Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2013 and 2012	3

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2013 and 2012	4

		Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2013 and 2012	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	46

	Item 4.	Controls and Procedures	48

PART II - OTHER INFORMATION			49

	Item 1.	Legal Proceedings	49

	Item 1A.	Risk Factors	49

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

	Item 3.	Defaults Upon Senior Securities	49

	Item 4.	Mine Safety Disclosures	49

	Item 5.	Other Information	49

	Item 6.	Exhibits	49

SIGNATURES			50

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	March 31, 2013			September 30, 2012

Cash and cash equivalents	$	89,031		$	145,051
Investment securities available for sale		521,892			435,250
Mortgage-backed securities available for sale		715,455			681,442
Loans receivable - net of allowance for loan losses of $3,706 at March 31, 2013 and $3,971 at September 30, 2012		330,927			326,981
Federal Home Loan Bank Stock, at cost		1,942			2,120
Accrued interest receivable		8,226			6,710
Insurance receivable		539			581
Premises, furniture, and equipment, net		18,163			17,738
Bank-owned life insurance		33,250			14,832
Foreclosed real estate and repossessed assets		9			838
Intangible assets		2,262			2,035
MPS accounts receivable		6,641			5,763
Assets held for sale		1,347			-
Other assets		10,615			9,557

Total assets	$	1,740,299		$	1,648,898

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	1,367,390		$	1,181,299
Interest-bearing checking		33,718			33,094
Savings deposits		32,958			26,053
Money market deposits		41,217			38,585
Time certificates of deposit		81,937			100,763
Total deposits		1,557,220			1,379,794
Advances from Federal Home Loan Bank		7,000			11,000
Securities sold under agreements to repurchase		7,676			26,400
Subordinated debentures		10,310			10,310
Accrued interest payable		187			177
Contingent liability		581			1,719
Accrued expenses and other liabilities		13,950			73,639
Total liabilities		1,596,924			1,503,039

STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2013 and September 30, 2012, respectively		-			-
Common stock, $.01 par value; 10,000,000 shares authorized, 5,576,099 and 5,576,099 shares issued, 5,497,914 and 5,443,881 shares outstanding at March 31, 2013 and September 30, 2012, respectively		56			56
Additional paid-in capital		78,757			78,769
Retained earnings - substantially restricted		65,622			60,776
Accumulated other comprehensive income		225			8,513
Treasury stock, 78,185 and 132,218 common shares, at cost, at March 31, 2013 and September 30, 2012, respectively		(1,285	)		(2,255	)
Total stockholders’ equity		143,375			145,859

Total liabilities and stockholders’ equity	$	1,740,299		$	1,648,898

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

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

	2013			2012			2013			2012

Interest and dividend income:
Loans receivable, including fees	$	3,735		$	4,492		$	7,862		$	9,032
Mortgage-backed securities		3,111			5,198			6,045			9,985
Other investments		2,872			609			5,441			897
		9,718			10,299			19,348			19,914
Interest expense:
Deposits		284			553			709			1,206
FHLB advances and other borrowings		529			335			937			659
		813			888			1,646			1,865

Net interest income		8,905			9,411			17,702			18,049

Provision (recovery) for loan losses		(300	)		200			(300	)		899

Net interest income after provision for loan losses		9,205			9,211			18,002			17,150

Non-interest income:
Card fees		13,960			15,691			25,496			29,604
Gain on sale of securities available for sale, net		322			11,381			1,976			12,431
Loan fees		234			290			502			619
Bank-owned life insurance income		293			130			418			258
Deposit fees		154			143			322			305
Gain (loss) on sale of foreclosed real estate		87			-			(313	)		-
Other income		45			(854	)		104			(754	)
Total non-interest income		15,095			26,781			28,505			42,463

Non-interest expense:
Compensation and benefits		9,116			8,057			17,393			15,233
Card processing expense		4,978			4,976			8,663			10,298
Occupancy and equipment expense		1,986			2,088			4,007			4,186
Data processing expense		291			278			611			553
Marketing		201			325			471			492
Legal and consulting expense		854			2,019			1,774			3,285
Impairment on assets held for sale		361			-			361			-
Other expense		2,798			2,470			5,383			4,957
Total non-interest expense		20,585			20,213			38,663			39,004


Income before income tax expense		3,715			15,779			7,844			20,609

Income tax expense		568			5,809			1,572			7,548

Net income	$	3,147		$	9,970		$	6,272		$	13,061

Earnings per common share:
Basic	$	0.57		$	3.12		$	1.15		$	4.10
Diluted	$	0.57		$	3.10		$	1.14		$	4.09

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in Thousands)

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

	2013			2012			2013			2012


Net income	$	3,147		$	9,970		$	6,272		$	13,061

Other comprehensive income (loss):
Change in net unrealized gain (loss) on securities available for sale		(8,303	)		(1,495	)		(11,446	)		2,009
Gains realized in net income		(322	)		(11,381	)		(1,976	)		(12,431	)
		(8,625	)		(12,876	)		(13,422	)		(10,422	)
Deferred income tax effect		(3,299	)		(4,925	)		(5,134	)		(3,987	)
Total other comprehensive loss		(5,326	)		(7,951	)		(8,288	)		(6,435	)
Total comprehensive income (loss)	$	(2,179	)	$	2,019		$	(2,016	)	$	6,626

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

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

For the Six Months Ended March 31, 2013 and 2012

(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 ($.26 per share)		-		-			(831	)		-			-			(831	)

Issuance of 55,189 common shares from treasury stock due to issuance of restricted stock		-		49			-			-			896			945

Stock compensation		-		18			-			-			-			18

Change in net unrealized gains (losses) on securities available for sale		-		-			-			(6,435	)		-			(6,435	)

Net income		-		-			13,061			-			-			13,061

Balance, March 31, 2012	$	34	$	32,538		$	57,724		$	(99	)	$	(2,862	)	$	87,335

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

Cash dividends declared on common stock ($.26 per share)		-		-			(1,426	)		-			-			(1,426	)

Issuance of common shares from the sales of equity securities		-		(123	)		-			-			-			(123	)

Issuance of 54,033 common shares from treasury stock due to issuance of restricted stock		-		(10	)		-			-			970			960

Stock compensation		-		121			-			-			-			121

Change in net unrealized gains (losses) on securities available for sale		-		-			-			(8,288	)		-			(8,288	)

Net income		-		-			6,272			-			-			6,272

Balance, March 31, 2013	$	56	$	78,757		$	65,622		$	225		$	(1,285	)	$	143,375

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Six Months Ended March 31,
	2013			2012

Cash flows from operating activities:
Net income	$	6,272		$	13,061
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net		9,634			7,599
Disbursement of non-real estate consumer loans originated for sale		-			(431,935	)
Proceeds from sale of non-real estate consumer loans		-			432,428
Proceeds from sale of 1-4 family residential mortgage loans		-			368
Loss on sale of loans		-			7
Provision (recovery) for loan losses		(300	)		899
(Gain) loss on other assets		(6	)		964
Gain on sale of securities available for sale, net		(1,976	)		(12,431	)
Net change in accrued interest receivable		(1,516	)		(1,607	)
Impairment on assets held for sale		361			-
Net change in other assets		(2,303	)		(2,966	)
Net change in accrued interest payable		10			(26	)
Net change in accrued expenses and other liabilities		(55,554	)		(715	)
Net cash provided by (used in) operating activities		(45,378	)		5,646

Cash flows from investing activities:
Purchase of securities available for sale		(406,511	)		(811,441	)
Proceeds from sales of securities available for sale		150,059			364,911
Proceeds from maturities and principal repayments of securities available for sale		116,302			93,906
Purchase of bank owned life insurance		(18,000	)		-
Loans purchased		(1,075	)		(4,372	)
Net change in loans receivable		(2,571	)		(6,399	)
Proceeds from sales of foreclosed real estate		427			382
Federal Home Loan Bank stock purchases		(204,522	)		(29,353	)
Federal Home Loan Bank stock redemptions		204,700			27,351
Proceeds from the sale of premises and equipment		5			30
Purchase of premises and equipment		(3,690	)		(1,718	)
Other, net		-			3,987
Net cash provided by (used in) investing activities		(164,876	)		(362,716	)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits		196,252			322,763
Net change in time deposits		(18,826	)		(12,187	)
Repayment of FHLB and other borrowings		(4,000	)		-
Net change in securities sold under agreements to repurchase		(18,724	)		5,543
Cash dividends paid		(1,426	)		(831	)
Stock compensation		121			18
Proceeds from issuance of common stock		837			945
Net cash provided by (used in) financing activities		154,234			316,251

Net change in cash and cash equivalents		(56,020	)		(40,819	)

Cash and cash equivalents at beginning of period		145,051			276,893
Cash and cash equivalents at end of period	$	89,031		$	236,074

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	1,637		$	1,891
Income taxes		3,342			3,409

Supplemental schedule of non-cash investing activities:
Loans transferred to foreclosed real estate	$	-		$	1,729

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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 periods ended March 31, 2013, 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.

Table of Contents

Loans receivable at March 31, 2013 and September 30, 2012 are as follows:

	March 31, 2013			September 30, 2012
	(Dollars in Thousands)

One to four family residential mortgage loans	$	65,743		$	49,134
Commercial and multi-family real estate loans		174,194			191,905
Agricultural real estate loans		27,843			19,861
Consumer loans		29,404			32,838
Commercial operating loans		14,668			16,452
Agricultural operating loans		23,112			20,981
Total Loans Receivable		334,964			331,171

Less:
Allowance for loan losses		(3,706	)		(3,971	)
Net deferred loan origination fees		(331	)		(219	)
Total Loans Receivable, Net	$	330,927		$	326,981

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and six month periods ended March 31, 2013 and 2012 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 March 31, 2013

Allowance for loan losses:
Beginning balance	$	188	$	2,870		$	1	$	3	$	50		$	18		$	833	$	3,963
Provision (recovery) for loan losses		77		(543	)		-		-		(65	)		(1	)		232		(300	)
Loan charge offs		-		-			-		-		-			-			-		-
Recoveries		-		2			-		1		40			-			-		43
Ending balance	$	265	$	2,329		$	1	$	4	$	25		$	17		$	1,065	$	3,706

Six Months Ended March 31, 2013

Allowance for loan losses:
Beginning balance	$	193	$	3,113		$	1	$	3	$	49		$	-		$	612	$	3,971
Provision (recovery) for loan losses		72		(778	)		-		-		(64	)		17			453		(300	)
Loan charge offs		-		(8	)		-		-		-			-			-		(8	)
Recoveries		-		2			-		1		40			-			-		43
Ending balance	$	265	$	2,329		$	1	$	4	$	25		$	17		$	1,065	$	3,706


Ending balance: individually evaluated for impairment	$	9	$	636		$	-	$	-	$	-		$	-		$	-	$	645
Ending balance: collectively evaluated for impairment	$	256	$	1,693		$	1	$	4	$	25		$	17		$	1,065	$	3,061

Loans:
Ending balance: individually evaluated for impairment	$	682	$	9,382		$	-	$	-	$	59		$	-		$	-	$	10,123
Ending balance: collectively evaluated for impairment	$	65,061	$	164,812		$	27,843	$	29,404	$	14,609		$	23,112		$	-	$	324,841

Table of Contents

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

Three Months Ended March 31, 2012

Allowance for loan losses:
Beginning balance	$	181		$	3,609		$	-	$	21		$	38		$	65		$	651		$	4,565
Provision (recovery) for loan losses		(31	)		366			-		6			(1	)		(65	)		(75	)		200
Loan charge offs		(3	)		-			-		-			-			-			-			(3	)
Recoveries		-			-			-		-			-			-			-			-
Ending balance	$	147		$	3,975		$	-	$	27		$	37		$	-		$	576		$	4,762

Six Months Ended March 31, 2012

Allowance for loan losses:
Beginning balance	$	165		$	3,901		$	-	$	16		$	36		$	67		$	741		$	4,926
Provision (recovery) for loan losses		(16	)		1,141			-		9			(3	)		(67	)		(165	)		899
Loan charge offs		(3	)		(1,067	)		-		(2	)		-			-			-			(1,072	)
Recoveries		1			-			-		4			4			-			-			9
Ending balance	$	147		$	3,975		$	-	$	27		$	37		$	-		$	576		$	4,762

Ending balance: individually evaluated for impairment	$	8		$	1,513		$	-	$	-		$	8		$	-		$	-		$	1,529
Ending balance: collectively evaluated for impairment	$	139		$	2,462		$	-	$	27		$	29		$	-		$	576		$	3,233

Loans:
Ending balance: individually evaluated for impairment	$	76		$	14,578		$	-	$	-		$	84		$	-		$	-		$	14,738
Ending balance: collectively evaluated for impairment	$	39,774		$	180,044		$	21,087	$	34,669		$	12,498		$	22,041		$	-		$	310,113

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 MetaBank (the “Bank”) 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,” 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.

Table of Contents

The asset classification of loans at March 31, 2013 and September 30, 2012, are as follows:

March 31, 2013
	1-4 Family Residential		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Total

Pass	$	65,213	$	150,334	$	27,770	$	29,404	$	14,285	$	21,399	$	308,405
Watch		191		11,682		73		-		14		1,713		13,673
Special Mention		14		3,565		-		-		369		-		3,948
Substandard		295		8,613		-		-		-		-		8,908
Doubtful		30		-		-		-		-		-		30
	$	65,743	$	174,194	$	27,843	$	29,404	$	14,668	$	23,112	$	334,964

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 generally up to ten years and a maximum of 30 years 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.

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.

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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 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.

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 20 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. 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.

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.

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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 by the conclusion of the fourth fiscal quarter of 2012. For the three and six months ended March 31, 2013, these relationships provided approximately $0.7 and $1.8 million, respectively, in total revenue (interest income plus non-interest income) to the Company.

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.

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 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.

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Past due loans at March 31, 2013 and September 30, 2012 are as follows:

March 31, 2013	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	$	71	$	-	$	-	$	71	$	65,365	$	307	$	65,743
Commercial Real Estate and Multi-Family		77		-		-		77		172,573		1,544		174,194
Agricultural Real Estate		-		-		-		-		27,843		-		27,843
Consumer		5		1		14		20		29,384		-		29,404
Commercial Operating		-		-		-		-		14,654		14		14,668
Agricultural Operating		-		-		-		-		23,112		-		23,112
Total	$	153	$	1	$	14	$	168	$	332,931	$	1,865	$	334,964

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

Impaired loans at March 31, 2013 and September 30, 2012 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
March 31, 2013

Loans without a specific valuation allowance
Residential 1-4 Family	$	620	$	620	$	-
Commercial Real Estate and Multi-Family		4,426		4,426		-
Agricultural Real Estate		-		-		-
Consumer		-		-		-
Commercial Operating		59		74		-
Agricultural Operating		-		-		-
Total	$	5,105