form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number:  0-22140
 
META FINANCIAL GROUP, INC. ®
(Exact name of registrant as specified in its charter)
 
Delaware   42-1406262
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
121 East Fifth Street, Storm Lake, Iowa 50588
(Address of principal executive offices)

(712) 732-4117
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x    NO o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o  NO o.
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class:
Outstanding at May 6, 2011:
Common Stock, $.01 par value
3,117,363 Common Shares
 


 
 


META FINANCIAL GROUP, INC.
FORM 10-Q
 
Table of Contents
     Page No. 
Part I. Financial Information  
     
Item 1.
Financial Statements (Unaudited):
 
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
31
     
44
     
46
     
Part II. Other Information  
     
47
     
47
     
47
     
47
     
47
     
47
     
47
     
 
48
 
 
i

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
ASSETS
 
March 31, 2011
   
September 30, 2010
 
                 
Cash and cash equivalents
  $ 158,708     $ 87,503  
Investment securities available for sale
    23,836       21,467  
Mortgage-backed securities available for sale
    601,953       485,385  
Loans receivable - net of allowance for loan losses of $4,741 at March 31, 2011 and $5,234 at September 30, 2010
    330,084       366,045  
Federal Home Loan Bank Stock, at cost
    5,194       5,283  
Accrued interest receivable
    4,447       4,759  
Bond insurance receivable
    4,192       3,683  
Premises, furniture, and equipment, net
    18,410       19,377  
Bank-owned life insurance
    14,059       13,796  
Foreclosed real estate and repossessed assets
    933       1,295  
Goodwill and intangible assets
    1,190       2,663  
MPS accounts receivable
    7,620       8,085  
Other assets
    12,777       10,425  
                 
Total assets
  $ 1,183,403     $ 1,029,766  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Non-interest-bearing checking
  $ 847,812     $ 675,163  
Interest-bearing checking
    34,041       29,976  
Savings deposits
    11,517       10,821  
Money market deposits
    35,015       35,422  
Time certificates of deposit
    118,660       146,072  
Total deposits
    1,047,045       897,454  
Advances from Federal Home Loan Bank
    22,000       22,000  
Securities sold under agreements to repurchase
    11,787       8,904  
Subordinated debentures
    10,310       10,310  
Accrued interest payable
    241       392  
Contingent liability
    3,212       3,983  
Accrued expenses and other liabilities
    15,878       14,679  
Total liabilities
    1,110,473       957,722  
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock, 800,000 shares authorized, no shares issued or outstanding
           
Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,117,363 and 3,111,413 shares outstanding at March 31, 2011 and September 30, 2010, respectively
    34       34  
Additional paid-in capital
    32,411       32,381  
Retained earnings - substantially restricted
    45,133       42,475  
Accumulated other comprehensive income (loss)
    (326 )     1,599  
Treasury stock, 255,636 and 261,586 common shares, at cost, at March 31, 2011 and September 30, 2010, respectively
    (4,322 )     (4,445 )
Total shareholders’ equity
    72,930       72,044  
                 
Total liabilities and shareholders’ equity
  $ 1,183,403     $ 1,029,766  
 
See Notes to Condensed Consolidated Financial Statements.

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
Interest and dividend income:
                       
Loans receivable, including fees
  $ 4,909     $ 7,376     $ 10,356     $ 14,101  
Mortgage-backed securities
    4,433       2,827       8,351       4,982  
Other investments
    238       180       493       364  
      9,580       10,383       19,200       19,447  
Interest expense:
                               
Deposits
    753       949       1,642       2,037  
FHLB advances and other borrowings
    410       433       863       1,090  
      1,163       1,382       2,505       3,127  
Net interest income
    8,417       9,001       16,695       16,320  
Provision for loan losses
    214       9,478       186       14,169  
                                 
Net interest income after provision for loan losses
    8,203       (477 )     16,509       2,151  
Non-interest income:
                               
Card fees
    18,392       37,116       32,466       56,660  
Gain on sale of securities available for sale, net
    632             1,158       1,854  
Deposit fees
    163       190       344       394  
Loan fees
    85       65       286       178  
Bank-owned life insurance income
    130       132       263       262  
Other income
    68       133       259       326  
Total non-interest income
    19,470       37,636       34,776       59,674  
Non-interest expense:
                               
Compensation and benefits
    8,188       8,861       15,984       17,532  
Card processing expense
    8,120       14,095       13,343       22,447  
Occupancy and equipment expense
    2,168       2,159       4,210       4,234  
Legal and consulting expense
    1,339       835       2,750       1,826  
Goodwill impairment
                1,508        
Marketing
    411       483       672       838  
Data processing expense
    273       177       546       369  
Other expense
    2,752       2,256       5,856       4,423  
Total non-interest expense
    23,251       28,866       44,869       51,669  
                                 
Income before income tax expense
    4,422       8,293       6,416       10,156  
Income tax expense
    1,675       3,119       2,948       3,790  
                                 
Net income
  $ 2,747     $ 5,174     $ 3,468     $ 6,366  
                                 
Earnings per common share:
                               
Basic
  $ 0.88     $ 1.76     $ 1.11     $ 2.29  
Diluted
  $ 0.88     $ 1.74     $ 1.11     $ 2.26  
                                 
Dividends declared per common share:
  $ 0.13     $ 0.13     $ 0.26     $ 0.26  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.®
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
 
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 2,747     $ 5,174     $ 3,468     $ 6,366  
                                 
Other comprehensive income (loss):
                               
Change in net unrealized gains (losses) on securities available for sale
    (1,006 )     1,525       (4,276 )     (3,301 )
Gains realized in net income
    632             1,158       1,854  
      (374 )     1,525       (3,118 )     (1,447 )
Deferred income tax effect
    (145 )     569       (1,193 )     (539 )
Total other comprehensive income (loss)
    (229 )     956       (1,925 )     (908 )
Total comprehensive income
  $ 2,518     $ 6,130     $ 1,543     $ 5,458  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.®
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders Equity (Unaudited)
For the Six Months Ended March 31, 2011 and 2010
(Dollars in Thousands, Except Share and Per Share Data)
 
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
   
Treasury
Stock
   
Total
Shareholders’
Equity
 
                                     
Balance, September 30, 2009
  $ 30     $ 23,551     $ 31,626     $ (1,838 )   $ (6,024 )   $ 47,345  
                                                 
Cash dividends declared on common stock ($.26 per share)
                (741 )                 (741 )
                                                 
Issuance of 415,000 common shares from the sales of equity securities
    4       8,571                         8,575  
                                                 
Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options
          (271 )                 661       390  
                                                 
Stock compensation
          91                         91  
                                                 
Change in net unrealized losses on securities available for sale
                      (908 )           (908 )
                                                 
Net income for six months ended March 31, 2010
                6,366                   6,366  
                                                 
Balance, March 31, 2010
  $ 34     $ 31,942     $ 37,251     $ (2,746 )   $ (5,363 )   $ 61,118  
                                                 
Balance, September 30, 2010
  $ 34     $ 32,381     $ 42,475     $ 1,599     $ (4,445 )   $ 72,044  
                                                 
Cash dividends declared on common stock ($.26 per share)
                (810 )                 (810 )
                                                 
Issuance of 5,950 common shares from treasury stock due to issuance of restricted stock and exercise of stock options
          (12 )                 123       111  
                                                 
Stock compensation
          42                         42  
                                                 
Change in net unrealized losses on securities available for sale
                      (1,925 )           (1,925 )
                                                 
Net income for six months ended March 31, 2011
                3,468                   3,468  
                                                 
Balance, March 31, 2011
  $ 34     $ 32,411     $ 45,133     $ (326 )   $ (4,322 )   $ 72,930  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.®
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
   
Six Months Ended March 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 3,468     $ 6,366  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion, net
    5,166       6,053  
Provision for loan losses
    186       14,169  
Gain on sale of securities available for sale, net
    (1,158 )     (1,854 )
Net change in accrued interest receivable
    312       14  
Goodwill impairment
    1,508        
Net change in other assets
    (2,822 )     (9,028 )
Net change in accrued interest payable
    (151 )     (109 )
Net change in accrued expenses and other liabilities
    428       8,619  
Net cash provided by operating activities
    6,937       24,230  
                 
Cash flows from investing activities:
               
Purchase of securities available for sale
    (238,464 )     (287,973 )
Net change in federal funds sold
          9  
Proceeds from sales of securities available for sale
    46,239       38,401  
Proceeds from maturities and principal repayments of securities available for sale
    68,066       107,379  
Loans purchased
    (1,039 )     (392 )
Net change in loans receivable
    36,960       (4,653 )
Proceeds from sales of foreclosed real estate
    362       807  
Net change in Federal Home Loan Bank stock
    89       89  
Proceeds from the sale of premises and equipment
           
Purchase of premises and equipment
    (955 )     (1,199 )
Other, net
    1,193       539  
Net cash used in investing activities
    (87,549 )     (146,993 )
                 
Cash flows from financing activities:
               
Net change in checking, savings, and money market deposits
    177,003       146,962  
Net change in time deposits
    (27,412 )     (21,333 )
Net change in advances from Federal Home Loan Bank
          (1,500 )
Net change in securities sold under agreements to repurchase
    2,883       721  
Cash dividends paid
    (810 )     (741 )
Proceeds from issuance of equity securities
          8,575  
Stock compensation
    42       91  
Proceeds from exercise of stock options
    111       390  
Net cash provided by financing activities
    151,817       133,165  
                 
Net increase in cash and cash equivalents
    71,205       10,402  
                 
Cash and cash equivalents at beginning of period
    87,503       6,168  
Cash and cash equivalents at end of period
  $ 158,708     $ 16,570  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for:
               
Interest
  $ 2,655     $ 3,235  
Income taxes
    1,834       64  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC. ®
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1.  BASIS OF PRESENTATION
 
The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2010 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 13, 2010.  Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.
 
The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended March 31, 2011, are not necessarily indicative of the results expected for the year ending September 30, 2011.
 
 
NOTE 2.  CREDIT DISCLOSURES
 
The Allowance for Loan Losses and Recorded Investment in loans at March 31, 2011 and September 30, 2010 are as follows:
 
   
1-4 Family
Residential
   
Commercial and
Multi Family
Real Estate
   
Agricultural
Real Estate
   
Consumer
   
Commercial
Business
   
Agricultural
Operating
   
Unallocated
   
Total
 
                                                 
Three Months Ended March 31, 2011
                                               
                                                 
Allowance for loan losses:
                                               
Beginning balance
  $ 47     $ 3,174     $ 25     $ 370     $ 110     $ 102     $ 935     $ 4,763  
Provision charged to expense
    76       274       13       (142 )     (3 )     (34 )     30       214  
Losses charged off
    (41 )                 (258 )     (15 )                 (314 )
Recoveries
                      78                         78  
Ending balance
  $ 82     $ 3,448     $ 38     $ 48     $ 92     $ 68     $ 965     $ 4,741  
                                                                 
Six Months Ended March 31, 2011
                                                               
                                                                 
Allowance for loan losses:
                                                               
Beginning balance
  $ 50     $ 3,053     $ 111     $ 738     $ 131     $ 125     $ 1,026     $ 5,234  
Provision charged to expense
    73       410       (73 )     (82 )     (24 )     (57 )     (61 )     186  
Losses charged off
    (41 )     (15 )           (758 )     (15 )                 (829 )
Recoveries
                      150                         150  
Ending balance
  $ 82     $ 3,448     $ 38     $ 48     $ 92     $ 68     $ 965     $ 4,741  
                                                                 
Ending balance: individually evaluated for impairment
  $     $ 1,410     $ 14     $ 39     $ 69     $     $     $ 1,532  
Ending balance: collectively evaluated for impairment
  $ 82     $ 2,038     $ 24     $ 9     $ 23     $ 68     $ 965     $ 3,209  
Ending balance: loans acquired with deteriorated credit quality
  $     $     $     $     $     $     $     $  
                                                                 
Loans:
                                                               
Ending balance: individually evaluated for impairment
  $     $ 16,228     $ 1,364     $ 96     $ 152     $     $     $ 17,840  
Ending balance: collectively evaluated for impairment
  $ 36,334     $ 184,142     $ 17,931     $ 38,770     $ 14,786     $ 25,022     $     $ 316,985  
Ending balance: loans acquired with deteriorated credit quality
  $     $     $     $     $     $     $     $  

 
The Asset Classification at March 31, 2011 and September 30, 2010 are as follows:
   
1-4 Family
Residential
   
Commercial and
Multi Family
Real Estate
     
Agricultural
Real Estate
     
Consumer
     
Commercial
Business
     
Agricultural
Operating
 
March 31, 2011
                                   
Pass
  $ 35,350     $ 158,623     $ 15,525     $ 38,286     $ 13,683     $ 18,189  
Watch
    739       21,311       2,387       295       1,096       6,833  
Special Mention
    245       4,208       19       190       7        
Substandard
          14,428       1,363       56       119        
Doubtful
          1,800             39       34        
    $ 36,334     $ 200,370     $ 19,294     $ 38,866     $ 14,939     $ 25,022  

 
     
1-4 Family
Residential
    Commercial and
Multi Family
Real Estate
     
Agricultural
Real Estate
     
Consumer
     
Commercial
Business
     
Agricultural
Operating
 
September 30, 2010
                                   
Pass
  $ 39,464     $ 182,812     $ 19,752     $ 47,349     $ 18,501     $ 22,874  
Watch
    750       4,869       3,094       119       710       8,261  
Special Mention
          7,109             197       108       1,393  
Substandard
          8,081       3,050       259       390        
Doubtful
          1,949             189              
    $ 40,214     $ 204,820     $ 25,896     $ 48,113     $ 19,709     $ 32,528  
 
One- to Four-Family Residential Mortgage Lending.  One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals.  The Company offers fixed-rate and ARM loans for both permanent structures and those under construction.  The Company’s one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
 
The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan-to-value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.
 
The Company currently offers one, three, five, seven and ten year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually.  These loans generally provide for an annual cap of up to a 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as is the Company’s cost of funds.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed rate residential loans.  Current market conditions make ARM loans unattractive and very few are originated.
 
Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.  The Company currently sells most, but not all, of its fixed-rate loans with terms greater than 15 years.
 
 
In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Most properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.
 
Commercial and Multi-Family Real Estate Lending.  The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and has purchased whole loan and participation interests in loans from other financial institutions.  The purchased loans and loan participation interests are generally secured by properties located in the Midwest and West.
 
The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by personal guarantees of the borrowers.  The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio.  Commercial and multi-family real estate loans provide for a margin over a number of different indices.  In underwriting these loans, the Company currently analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.  Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.
 
Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
 
Agricultural Lending.  The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm related products.  Agricultural operating loans are originated at either an adjustable or fixed rate of interest for up to a one year term or, in the case of livestock, upon sale.  Most agricultural operating loans have terms of one year or less.  Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year.  Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.
 
Agricultural real estate loans are frequently originated with adjustable rates of interest.  Generally, such loans provide for a fixed rate of interest for the first one to five years, which then balloon or adjust annually thereafter.  In addition, such loans generally amortize over a period of ten to 20 years.  Adjustable-rate agricultural real estate loans provide for a margin over the yields on the corresponding U.S. Treasury security or prime rate.  Fixed-rate agricultural real estate loans generally have terms up to five years.  Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
 
 
Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one- to four-family residential lending.  Nevertheless, agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amount.  In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.  The success of the loan may also be affected by many factors outside the control of the farm borrower.
 
Weather presents one of the greatest risks as hail, drought, floods, or other conditions, can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral.  This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment.  Government support programs and the Company generally require that farmers procure crop insurance coverage.  Grain and livestock prices also present a risk as prices may decline prior to sale resulting in a failure to cover production costs.  These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk.  The Company frequently requires borrowers to use future contracts or options to reduce price risk and help ensure loan repayment.  Another risk is the uncertainty of government programs and other regulations.  During periods of low commodity prices, the income from government programs can be a significant source of cash to make loan payments and if these programs are discontinued or significantly changed, cash flow problems or defaults could result.  Finally, many farms are dependent on a limited number of key individuals upon whose injury or death may result in an inability to successfully operate the farm.
 
Consumer Lending- Retail Bank.  The Retail Bank offers a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Retail Bank offers other secured and unsecured consumer loans.  The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas.  The Retail Bank originates consumer loans on both a direct and indirect basis.
 
The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail Bank will lend amounts which, together with all prior liens, typically may be up to 100% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.
 
The Retail Bank primarily originates automobile loans on a direct basis, but also originates indirect automobile loans on a very limited basis.  Direct loans are loans made when the Retail Bank extends credit directly to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers.  The Retail Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles.  Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.
 
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.
 
Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
 
 
Consumer Lending- Meta Payment Systems (MPS).  MPS offers credit products on a nationwide basis in the following categories (1) sponsorship lending and (2) portfolio lending.  In a sponsorship lending model, MPS typically originates loans and sells (without recourse) the resulting receivables to third party investors.  In portfolio lending, the Company retains some or all receivables and relies on the borrower as the underlying source of repayment.
 
Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
 
The Company monitors concentrations of credit that may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location or an occupation.
 
Commercial Business Lending.  The Company also originates commercial business loans.  Most of the Company’s commercial business loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable.  Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.
 
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan.  The Company’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than more traditional investments.
 
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment).  The Company’s commercial business loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.  Commercial business loans have been a declining percentage of the Company’s loan portfolio since 2005.
 
Classified Assets.  Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Office of Thrift Supervision (the “OTS”) to be of lesser quality as “substandard,” “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the savings association will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. 
 
 
When assets are classified as either substandard or doubtful, the Bank may establish general or specific allowances for loan losses in an amount deemed prudent by management.  General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of their assets and the amount of their valuation allowances are subject to review by their regulatory authorities, who may order the establishment of additional general or specific loss allowances.
 
Past due loans at March 31, 2011 and September 30, 2010 are as follows:

 
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
Receivable
   
Loans > 90 Days
and Accruing
 
March 31, 2011
                                         
Residential 1-4 Family
  $ 57     $ 128     $ 187     $ 372     $ 35,962     $ 36,334     $ 80  
Commercial Real Estate and Multi Family
    773             15,427       16,200       184,170       200,370       7,540  
Agricultural Real Estate
          657       929       1,586       17,708       19,294        
Consumer
    13       16       43       72       38,794       38,866       43  
Commercial Operating
                61       61       14,878       14,939        
Agricultural Real Operating
    794                   794       24,228       25,022        
Total
  $ 1,637     $ 801     $ 16,647     $ 19,085     $ 315,740     $ 334,825     $ 7,663  
                                                         
September 30, 2010
                                                       
                                                         
Residential 1-4 Family
  $ 192     $ 9     $ 443     $ 644     $ 39,570     $ 40,214     $ 404  
Commercial Real Estate and Multi Family
    3,900       746       4,394       9,040       195,780       204,820       257  
Agricultural Real Estate
                2,196       2,196       23,700       25,896        
Consumer
    192       38       124       354       47,759       48,113       124  
Commercial Operating
    329             202       531       19,178       19,709        
Agricultural Real Operating
                400       400       32,128       32,528        
Total
  $ 4,613     $ 793     $ 7,759     $ 13,165     $ 358,115     $ 371,280     $ 785  
 
 
Impaired loans at March 31, 2011 and September 30, 2010 are as follows:
                               
   
Recorded
Balance
   
Unpaid Principal
Balance
   
Specific
Allowance
   
Average Investment
in Impaired Loans
   
Interest Income
Recognized
 
March 31, 2011
                             
                               
Loans without a specific valuation allowance                              
Residential 1-4 Family
  $ 1,219     $ 1,219     $     $ 597     $ 126  
Commercial Real Estate and Multi Family
    25,500       25,500             18,285       303  
Agricultural Real Estate
    2,406       2,406             4,025       186  
Consumer
    485       485             359       5  
Commercial Operating
    887       887             775       12  
Agricultural Real Operating
    6,833       6,833             8,062       79  
Total
  $ 37,330     $ 37,330     $     $ 32,103     $ 711  
Loans with a specific valuation allowance                                        
Residential 1-4 Family
  $     $     $     $ 6     $  
Commercial Real Estate and Multi Family
    16,228       21,630       1,410       10,067       442  
Agricultural Real Estate
    1,364       1,364       14       1,259        
Consumer
    96       142       39       280       1  
Commercial Operating
    152       167       69       697       2  
Agricultural Real Operating
                      69        
Total
  $ 17,840     $ 23,303     $ 1,532     $ 12,378     $ 445  
                                         
September 30, 2010
                                       
                                         
Loans without a specific valuation allowance                                        
Residential 1-4 Family
  $ 849     $ 849     $     $ 510     $ 101  
Commercial Real Estate and Multi Family
    11,878       11,878             13,419       166  
Agricultural Real Estate
    4,297       4,297             4,455       272  
Consumer
    316       316             512       3  
Commercial Operating
    818       818             1,175       6  
Agricultural Real Operating
    8,452       8,452             6,801       310  
Total
  $ 26,610     $ 26,610     $     $ 26,872     $ 858  
Loans with a specific valuation allowance                                         
Residential 1-4 Family
  $     $     $     $ 48     $  
Commercial Real Estate and Multi Family
    10,030       15,578       827       9,772       60  
Agricultural Real Estate
    3,050       3,050       81       626        
Consumer
    448       448       13       325       3  
Commercial Operating
    390       390       101       1,284       2  
Agricultural Real Operating
                      1,140        
Total
  $ 13,918     $ 19,466     $ 1,022     $ 13,195     $ 65  

 
Troubled debt restructured loans at March 31, 2011 and September 30, 2010 are as follows:
 
      March 31, 2011       September 30, 2010  
     
Number of
Loans
     
Pre-Modification
Outstanding
Recorded Balance
     
Post-Modification
Outstanding
Recorded Balance
     
Number of
Loans
     
Pre-Modification
Outstanding
Recorded Balance
     
Post-Modification
Outstanding
Recorded Balance
 
                                     
Residential 1-4 Family
    1     $ 43     $ 43       1     $ 45     $ 45  
Commercial Real Estate and Multi Family
    5       3,910       3,910       2       377       377  
Agricultural Real Estate
                                   
Consumer
                                   
Commercial Operating
    1       34       49                    
Agricultural Real Operating
                                   
 
NOTE 3.  ALLOWANCE FOR LOAN LOSSES
 
At March 31, 2011, the Company’s allowance for loan losses was $4.7 million, a decrease of $0.5 million from $5.2 million at September 30, 2010.  During the six months ended March 31, 2011 the Company recorded a provision for loan losses of $0.2 million. 
 
During the six months ended March 31, 2011, the Company recorded a retail bank provision in the amount of $0.3 million due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans.
 
During the three months ended March 31, 2011, the Company recorded a provision for loan losses in the amount of $0.2 million, consisting of a negative provision of $0.1 million related to the discontinuance of the MPS iAdvance loan program and a provision of $0.3 million primarily related to increases in non-performing loans.  The Company’s total net charge-offs for the three and six months ended March 31, 2011 were $0.2 million and $0.7 million, respectively.  Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Company and its borrowers operate.
 
Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses.
 
NOTE 4.  EARNINGS PER COMMON SHARE (“EPS”)
 
Basic EPS is computed by dividing income (loss) available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.
 
 
A reconciliation of the income and common stock share amounts used in the computation of basic and diluted EPS for the three and six months ended March 31, 2011 and 2010 is presented below.
 
Three Months Ended March 31,
 
2011
   
2010
 
(Dollars in Thousands, Except Share and Per Share Data)
           
             
Earnings
           
Net Income
  $ 2,747     $ 5,174  
                 
Basic EPS
               
Weighted average common shares outstanding
    3,115,640       2,942,383  
Less weighted average unallocated ESOP and nonvested shares
    (1,667 )     (3,334 )
Weighted average common shares outstanding
    3,113,973       2,939,049  
                 
Earnings Per Common Share
               
Basic
  $ 0.88     $ 1.76  
                 
Diluted EPS
               
Weighted average common shares outstanding for basic earnings per common share
    3,113,973       2,939,049  
Add dilutive effect of assumed exercises of stock options, net of tax benefits
    1,896       33,710  
Weighted average common and dilutive potential common shares outstanding
    3,115,869       2,972,759