form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number:  0-22140

META FINANCIAL GROUP, INC. ®
(Exact name of registrant as specified in its charter)
 
Delaware       42-1406262
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
 
121 East Fifth Street, Storm Lake, Iowa  50588
(Address of principal executive offices)

(712) 732-4117
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x NO o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (Check one):
 
Large accelerated filer    o Accelerated filer   o   Non-accelerated filer   o Smaller Reporting Company   x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES xNO
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class:       Outstanding at August 4, 2011:
Common Stock, $.01 par value   3,117,363 Common Shares
 


 
 

 
 
META FINANCIAL GROUP, INC.
FORM 10-Q
                                                                                       
Part I.   Financial Information
   
Page No.
     
 
Item 1.
Financial Statements (Unaudited):
   
       
    1
 
  
 
 
  2
       
  3
       
  4
       
    5
       
   
6
       
Item 2.
  32
       
Item 3.
 
44
       
Item 4.
 
46
       
Part II.  Other Information
   
       
Item 1.
 
47
       
Item 1A.
 
47
       
Item 2.
 
48
       
Item 3.
 
48
       
Item 4.
 
48
       
Item 5.
 
48
       
Item 6.
 
48
       
 
49
 
 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Share and Per Share Data) (Unaudited)

ASSETS
 
June 30, 2011
   
September 30, 2010
 
             
Cash and cash equivalents
  $ 65,210     $ 87,503  
Investment securities available for sale
    27,017       21,467  
Mortgage-backed securities available for sale
    602,091       485,385  
Loans receivable - net of allowance for loan losses of $4,882 at June 30, 2011 and $5,234 at September 30, 2010
    312,328       366,045  
Federal Home Loan Bank Stock, at cost
    5,404       5,283  
Accrued interest receivable
    4,230       4,759  
Bond insurance receivable
    4,192       3,683  
Premises, furniture, and equipment, net
    17,742       19,377  
Bank-owned life insurance
    14,191       13,796  
Foreclosed real estate and repossessed assets
    2,460       1,295  
Goodwill and intangible assets
    1,408       2,663  
MPS accounts receivable
    6,881       8,085  
Other assets
    11,326       10,425  
                 
Total assets
  $ 1,074,480     $ 1,029,766  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Non-interest-bearing checking
  $ 730,896     $ 675,163  
Interest-bearing checking
    33,899       29,976  
Savings deposits
    11,713       10,821  
Money market deposits
    34,827       35,422  
Time certificates of deposit
    117,254       146,072  
Total deposits
    928,589       897,454  
Advances from Federal Home Loan Bank
    21,000       22,000  
Securities sold under agreements to repurchase
    9,682       8,904  
Subordinated debentures
    10,310       10,310  
Accrued interest payable
    247       392  
Contingent liability
    4,015       3,983  
Accrued expenses and other liabilities
    22,573       14,679  
Total liabilities
    996,416       957,722  
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock, 800,000 shares authorized, no shares issued or outstanding
    -       -  
Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,117,363 and 3,111,413 shares outstanding at June 30, 2011 and September 30, 2010, respectively
    34       34  
Additional paid-in capital
    32,432       32,381  
Retained earnings - substantially restricted
    43,707       42,475  
Accumulated other comprehensive income
    6,213       1,599  
Treasury stock, 255,636 and 261,586 common shares, at cost, at June 30, 2011 and September 30, 2010, respectively
    (4,322 )     (4,445 )
Total shareholders’ equity
    78,064       72,044  
                 
Total liabilities and shareholders’ equity
  $ 1,074,480     $ 1,029,766  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
             
   
2011
   
2010
   
2011
   
2010
 
                         
Interest and dividend income:
                       
Loans receivable, including fees
  $ 4,538     $ 5,523     $ 14,894     $ 19,624  
Mortgage-backed securities
    5,232       4,393       13,583       9,375  
Other investments
    210       198       703       562  
      9,980       10,114       29,180       29,561  
Interest expense:
                               
Deposits
    732       939       2,374       2,976  
FHLB advances and other borrowings
    421       517       1,284       1,607  
      1,153       1,456       3,658       4,583  
                                 
Net interest income
    8,827       8,658       25,522       24,978  
                                 
Provision for loan losses
    (161 )     609       25       14,778  
                                 
Net interest income after provision for loan losses
    8,988       8,049       25,497       10,200  
                                 
Non-interest income:
                               
Card fees
    8,272       18,206       40,738       74,866  
Deposit fees
    144       191       488       585  
Bank-owned life insurance income
    132       132       395       394  
Loan fees
    69       68       355       246  
Gain on sale of securities available for sale, net
    -       239       1,158       2,093  
Other income
    91       (43 )     350       283  
Total non-interest income
    8,708       18,793       43,484       78,467  
                                 
Non-interest expense:
                               
Compensation and benefits
    7,158       7,500       23,142       25,032  
Card processing expense
    5,898       8,060       19,241       29,897  
Occupancy and equipment expense
    2,166       1,995       6,376       6,229  
Legal and consulting expense
    974       521       3,724       2,405  
Marketing
    251       384       923       1,593  
Data processing expense
    272       756       818       1,306  
Goodwill impairment
    -       -       1,508       -  
Other expense
    2,593       1,943       8,449       6,366  
Total non-interest expense
    19,312       21,159       64,181       72,828  
                                 
                                 
Income (loss) before income tax expense (benefit)
    (1,616 )     5,683       4,800       15,839  
                                 
Income tax expense (benefit)
    (596 )     2,145       2,352       5,935  
                                 
Net income (loss)
  $ (1,020 )   $ 3,538     $ 2,448     $ 9,904  
                                 
Earnings (loss) per common share:
                               
Basic
  $ (0.33 )   $ 1.15     $ 0.79     $ 3.44  
Diluted
  $ (0.33 )   $ 1.11     $ 0.79     $ 3.37  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
                         
Net income (loss)
  $ (1,020 )   $ 3,538     $ 2,448     $ 9,904  
                                 
Other comprehensive income:
                               
Change in net unrealized gains on securities available for sale
    10,579       8,498       6,303       5,196  
Gains realized in net income
    -       239       1,158       2,093  
      10,579       8,737       7,461       7,289  
Deferred income tax effect
    4,039       3,259       2,847       2,719  
Total other comprehensive income
    6,540       5,478       4,614       4,570  
Total comprehensive income
  $ 5,520     $ 9,016     $ 7,062     $ 14,474  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
META FINANCIAL GROUP, INC.®
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2011 and 2010
(Dollars in Thousands, Except Share and Per Share Data)

                     
Accumulated
             
                     
Other
             
         
Additional
         
Comprehensive
         
Total
 
   
Common
   
Paid-in
   
Retained
   
Income (Loss),
   
Treasury
   
Shareholders’
 
   
Stock
   
Capital
   
Earnings
   
Net of Tax
   
Stock
   
Equity
 
                                     
Balance, September 30, 2009
  $ 30     $ 23,551     $ 31,626     $ (1,838 )   $ (6,024 )   $ 47,345  
                                                 
Cash dividends declared on common stock ($.39 per share)
    -       -       (1,142 )     -       -       (1,142 )
                                                 
Issuance of 415,000 common shares from the sales of equity securities
    4       8,563       -       -       -       8,567  
                                                 
Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options
    -       (272 )     -       -       894       622  
                                                 
Stock compensation
    -       (69 )     -       -       -       (69 )
                                                 
Change in net unrealized losses on securities available for sale
    -       -       -       4,570       -       4,570  
                                                 
Net income for nine months ended June 30, 2010
    -       -       9,904       -       -       9,904  
                                                 
Balance, June 30, 2010
  $ 34     $ 31,773     $ 40,388     $ 2,732     $ (5,130 )   $ 69,797  
                                                 
Balance, September 30, 2010
  $ 34     $ 32,381     $ 42,475     $ 1,599     $ (4,445 )   $ 72,044  
                                                 
Cash dividends declared on common stock ($.39 per share)
    -       -       (1,216 )     -       -       (1,216 )
                                                 
Issuance of 5,950 common shares from treasury stock due to issuance of restricted stock and exercise of stock options
    -       (10 )     -       -       123       113  
                                                 
Stock compensation
    -       61       -       -       -       61  
                                                 
Change in net unrealized losses on securities available for sale
    -       -       -       4,614       -       4,614  
                                                 
Net income for nine months ended June 30, 2011
    -       -       2,448       -       -       2,448  
                                                 
Balance, June 30, 2011
  $ 34     $ 32,432     $ 43,707     $ 6,213     $ (4,322 )   $ 78,064  
 
See Notes to Condensed Consolidated Financial Statements.
 
 
4


META FINANCIAL GROUP, INC.®
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)

   
Nine Months Ended June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 2,448     $ 9,904  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion, net
    7,427       8,716  
Provision for loan losses
    25       14,778  
Gain on sale of securities available for sale, net
    (1,158 )     (2,093 )
Net change in accrued interest receivable
    529       (265 )
Goodwill impairment
    1,508       -  
Net change in other assets
    (983 )     (1,575 )
Net change in accrued interest payable
    (145 )     (129 )
Net change in accrued expenses and other liabilities
    7,926       5,627  
Net cash provided by operating activities
    17,577       34,963  
                 
Cash flows from investing activities:
               
Purchase of securities available for sale
    (259,896 )     (378,557 )
Net change in federal funds sold
    -       9  
Proceeds from sales of securities available for sale
    46,238       93,359  
Proceeds from maturities and principal repayments of
               
securities available for sale
    95,460       156,327  
Loans purchased
    (1,039 )     (1,287 )
Net change in loans receivable
    52,881       4,678  
Proceeds from sales of foreclosed real estate
    832       733  
Net change in Federal Home Loan Bank stock
    (121 )     (1,036 )
Purchase of premises and equipment
    (1,249 )     (1,766 )
Other, net
    (2,847 )     (2,719 )
Net cash used in investing activities
    (69,741 )     (130,259 )
                 
Cash flows from financing activities:
               
Net change in checking, savings, and money market deposits
    59,953       92,269  
Net change in time deposits
    (28,818 )     (4,511 )
Net change in advances from Federal Home Loan Bank
    (1,000 )     9,200  
Net change in securities sold under agreements to repurchase
    778       1,616  
Cash dividends paid
    (1,216 )     (1,142 )
Proceeds from issuance of equity securities
    -       8,567  
Stock compensation
    61       (69 )
Proceeds from exercise of stock options
    113       622  
Net cash provided by financing activities
    29,871       106,552  
                 
Net increase (decrease) in cash and cash equivalents
    (22,293 )     11,256  
                 
Cash and cash equivalents at beginning of period
    87,503       6,168  
Cash and cash equivalents at end of period
  $ 65,210     $ 17,424  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for:
               
Interest
  $ 3,803     $ 4,711  
Income taxes
    3,078       1,664  
                 
Supplemental schedule of non-cash investing and financing activities:
               
Loans transferred to foreclosed real estate
  $ 2,025     $ 244  

See Notes to Condensed Consolidated Financial Statements.
 
META FINANCIAL GROUP, INC. ®
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1.  BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2010 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 13, 2010.  Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended June 30, 2011, are not necessarily indicative of the results expected for the year ending September 30, 2011.

 
NOTE 2.  CREDIT DISCLOSURES

The Allowance for Loan Losses and Recorded Investment in loans at June 30, 2011 is as follows:
 
   
1-4 Family
Residential
   
Commercial and
 Multi Family
 Real Estate
   
Agricultural
 Real Estate
   
Consumer
   
Commercial
Business
   
Agricultural
 Operating
   
Unallocated
   
Total
 
                                                 
Three Months Ended June 30, 2011
                                               
                                                 
Allowance for loan losses:
                                               
Beginning balance
    $82       $3,448       $38       $48       $92       $68       $965       $4,741  
Provision charged to expense
    85       96       (38 )     (297 )     31       (3 )     (35 )     (161 )
Losses charged off
    (37 )     -       -       (7 )     (29 )     -       -       (73 )
Recoveries
    4       102       -       269       -       -       -       375  
Ending balance
    $134       $3,646       $-       $13       $94       $65       $930       $4,882  
                                                                 
Nine Months Ended June 30, 2011
                                                               
                                                                 
Allowance for loan losses:
                                                               
Beginning balance
    $50       $3,053       $111       $738       $131       $125       $1,026       $5,234  
Provision charged to expense
    159       506       (111 )     (379 )     6       (60 )     (96 )     25  
Losses charged off
    (79 )     (15 )     -       (764 )     (43 )     -       -       (901 )
Recoveries
    4       102       -       418       -       -       -       524  
Ending balance
    $134       $3,646       $-       $13       $94       $65       $930       $4,882  
                                                                 
                                                                 
Ending balance: individually evaluated for impairment
    $31       $1,696       $-       $6       $54       $-       $-       $1,787  
Ending balance: collectively evaluated for impairment
    $103       $1,950       $-       $7       $40       $65       $930       $3,095  
Ending balance: loans acquired with deteriorated credit quality
    $-       $-       $-       $-       $-       $-       $-       $-  
                                                                 
Loans:
                                                               
Ending balance: individually evaluated for impairment
    $336       $18,962       $19       $61       $313       $-       $-       $19,691  
Ending balance: collectively evaluated for impairment
    $34,303       $176,744       $16,093       $36,533       $15,485       $18,361       $-       $297,519  
Ending balance: loans acquired with deteriorated credit quality
    $-       $-       $-       $-       $-       $-       $-       $-  

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

June 30, 2011
                                   
   
1-4 Family
Residential
   
Commercial and
Multi Family
Real Estate
   
Agricultural
 Real Estate
   
Consumer
   
Commercial
Business
   
Agricultural
Operating
 
                                     
Pass
  $ 33,333     $ 164,118     $ 16,093     $ 35,996     $ 14,603     $ 11,874  
Watch
    473       8,011       -       442       823       6,487  
Special Mention
    497       4,615       -       95       59       -  
Substandard
    336       16,456       19       59       281       -  
Doubtful
    -       2,506       -       2       32       -  
    $ 34,639     $ 195,706     $ 16,112     $ 36,594     $ 15,798     $ 18,361  
                                                 
                                                 
September 30, 2010
                                               
   
1-4 Family
Residential
   
Commercial and
Multi Family
Real Estate
   
Agricultural
Real Estate
   
Consumer
   
Commercial
 Business
   
Agricultural
Operating
 
                                                 
Pass
  $ 39,464     $ 182,812     $ 19,752     $ 47,349     $ 18,501     $ 22,874  
Watch
    750       4,869       3,094       119       710       8,261  
Special Mention
    -       7,109       -       197       108       1,393  
Substandard
    -       8,081       3,050       259       390       -  
Doubtful
    -       1,949       -       189       -       -  
    $ 40,214     $ 204,820     $ 25,896     $ 48,113     $ 19,709     $ 32,528  
 
One- to Four-Family Residential Mortgage Lending.  One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals.  The Company offers fixed-rate and ARM loans for both permanent structures and those under construction.  The Company’s one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
 
The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan-to-value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.
 
The Company currently offers one, three, five, seven and ten year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually.  These loans generally provide for an annual cap of up to a 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as is the Company's cost of funds.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed rate residential loans.  Current market conditions make ARM loans unattractive and very few are originated.
 
Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.  The Company currently sells most, but not all, of its fixed-rate loans with terms greater than 15 years.
 
 
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”) and its successor, the Office of the Comptroller of the Currency (“OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the savings association will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
 
 
When assets are classified as either substandard or doubtful, the Bank may establish general or specific allowances for loan losses in an amount deemed prudent by management.  General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of their assets and the amount of their valuation allowances are subject to review by their regulatory authorities, who may order the establishment of additional general or specific loss allowances.
 
Past due loans at June 30, 2011 and September 30, 2010 are as follows:

June 30, 2011
 
30-59 Days
 Past Due
   
60-89 Days
Past Due
   
Greater Than
 90 Days
   
Total Past
Due
   
Current
   
Total Loans
 Receivable
   
Loans > 90 Days
and Accruing
 
                                           
Residential 1-4 Family
  $ 405     $ 173     $ 257     $ 835     $ 33,804     $ 34,639     $ 80  
Commercial Real Estate and Multi Family
    793       838       13,596       15,227       180,479       195,706       -  
Agricultural Real Estate
    -       -       19       19       16,093       16,112       -  
Consumer
    4       -       7       11       36,583       36,594       7  
Commercial Operating
    1       -       32       33       15,765       15,798       -  
Agricultural Real Operating
    -       -       -       -       18,361       18,361       -  
Total
  $ 1,203     $ 1,011     $ 13,911     $ 16,125     $ 301,085     $ 317,210     $ 87  
                                                         
September 30, 2010
                                                       
                                                         
Residential 1-4 Family
  $ 192     $ 9     $ 443     $ 644     $ 39,570     $ 40,214     $ 404  
Commercial Real Estate and Multi Family
    3,900       746       4,394       9,040       195,780       204,820       257  
Agricultural Real Estate
    -       -       2,196       2,196       23,700       25,896       -  
Consumer
    192       38       124       354       47,759       48,113       124  
Commercial Operating
    329       -       202       531       19,178       19,709       -  
Agricultural Real Operating
    -       -       400       400       32,128       32,528       -  
Total
  $ 4,613     $ 793     $ 7,759     $ 13,165     $ 358,115     $ 371,280     $ 785  
 
 
Impaired loans at June 30, 2011 and September 30, 2010 are as follows:

   
Recorded
Balance
   
Unpaid Principal
 Balance
   
Specific
Allowance
   
Average Investment
in Impaired Loans
   
Interest Income
Recognized
 
June 30, 2011
                             
                               
Loans without a specific valuation allowance
                             
Residential 1-4 Family
  $ 970     $ 970     $ -     $ 692     $ 50  
Commercial Real Estate and Multi Family
    12,626       12,626       -       18,297       169  
Agricultural Real Estate
    -       -       -       3,010       -  
Consumer
    536       536       -       380       45  
Commercial Operating
    882       882       -       825       12  
Agricultural Real Operating
    6,487       6,487       -       7,720       91  
Total
  $ 21,501     $ 21,501     $ -     $ 30,924     $ 367  
Loans with a specific valuation allowance
                                       
Residential 1-4 Family
  $ 336     $ 336     $ 31     $ 69     $ 10  
Commercial Real Estate and Multi Family
    18,962       24,393       1,696       12,215       114  
Agricultural Real Estate
    19       19       -       1,255       -  
Consumer
    61       94       6       229       1  
Commercial Operating
    313       328       54       479       2  
Agricultural Real Operating
    -       -       -       69       -  
Total
  $ 19,691     $ 25,170     $ 1,787     $ 14,316     $ 127  
                                         
                                         
September 30, 2010
                                       
                                         
Loans without a specific valuation allowance
                                       
Residential 1-4 Family
  $ 849     $ 849     $ -     $ 510     $ 101  
Commercial Real Estate and Multi Family
    11,878       11,878       -       13,419       166  
Agricultural Real Estate
    4,297       4,297       -       4,455       272  
Consumer
    316       316       -       512       3  
Commercial Operating
    818       818       -       1,175       6  
Agricultural Real Operating
    8,452       8,452       -       6,801       310  
Total
  $ 26,610     $ 26,610     $ -     $ 26,872     $ 858  
Loans with a specific valuation allowance
                                       
Residential 1-4 Family
  $ -     $ -     $ -     $ 48     $ -  
Commercial Real Estate and Multi Family
    10,030       15,578       827       9,772       60  
Agricultural Real Estate
    3,050       3,050       81       626       -  
Consumer
    448       448       13       325       3  
Commercial Operating
    390       390       101       1,284       2  
Agricultural Real Operating
    -       -       -       1,140       -  
Total
  $ 13,918     $ 19,466     $ 1,022     $ 13,195     $ 65  
 
 
Troubled debt restructured loans at June 30, 2011 and September 30, 2010 are as follows:

   
June 30, 2011
   
September 30, 2010
 
   
Number of
Loans
   
Pre-Modification
Outstanding
 Recorded Balance
   
Post-Modification
Outstanding
Recorded Balance
   
Number of
 Loans
   
Pre-Modification
Outstanding
Recorded Balance
   
Post-Modification
Outstanding
Recorded Balance
 
                                     
Residential 1-4 Family
    3     $ 329     $ 329       1     $ 45     $ 45  
Commercial Real Estate and Multi Family
    5       3,883       3,883       2       377       377  
Agricultural Real Estate
    -       -       -       -       -       -  
Consumer
    -       -       -       -       -       -  
Commercial Operating
    2       39       54       -       -       -  
Agricultural Real Operating
    -       -       -       -       -       -