form10q.htm


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

FORM 10-Q

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

For the quarterly period ended December 31, 2011

¨  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 ¨

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 ¨

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 ¨
Accelerated filer ¨
Non-accelerated filer   ¨
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    x NO

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

Class:
Outstanding at February 13, 2012:
Common Stock, $.01 par value
3,191,265 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
     
Item 2.
30
     
Item 3.
40
     
Item 4.
42
     
Part II.  Other Information
 
     
Item 1.
43
     
Item 1A.
43
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
43
     
Item 6.
43
     
44

 
i

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Share and Per Share Data)

ASSETS
 
December 31, 2011
   
September 30, 2011
 
   
(Unaudited)
       
             
Cash and cash equivalents
  $ 156,882     $ 276,893  
Investment securities available for sale
    42,428       28,330  
Mortgage-backed securities available for sale
    770,378       590,918  
Loans receivable - net of allowance for loan losses of $4,565 at December 31, 2011 and $4,926 at September 30, 2011
    317,804       314,410  
Federal Home Loan Bank Stock, at cost
    10,744       4,737  
Accrued interest receivable
    4,442       4,133  
Insurance receivable
    2,264       2,264  
Premises, furniture, and equipment, net
    17,077       17,168  
Bank-owned life insurance
    14,450       14,322  
Foreclosed real estate and repossessed assets
    3,954       2,671  
Intangible assets
    1,562       1,315  
MPS accounts receivable
    8,257       7,677  
Other assets
    8,963       10,643  
                 
Total assets
  $ 1,359,205     $ 1,275,481  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Non-interest-bearing checking
  $ 1,035,421     $ 945,956  
Interest-bearing checking
    34,489       31,249  
Savings deposits
    11,651       11,136  
Money market deposits
    36,562       36,717  
Time certificates of deposit
    106,673       116,562  
Total deposits
    1,224,796       1,141,620  
Advances from Federal Home Loan Bank
    11,000       11,000  
Securities sold under agreements to repurchase
    7,451       8,055  
Subordinated debentures
    10,310       10,310  
Accrued interest payable
    207       223  
Contingent liability
    3,450       3,649  
Accrued expenses and other liabilities
    16,433       20,047  
Total liabilities
    1,273,647       1,194,904  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, 800,000 shares authorized, no shares issued or outstanding
    -       -  
Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,191,265 and 3,146,867 shares outstanding at December 31, 2011 and September 30, 2011, respectively
    34       34  
Additional paid-in capital
    32,535       32,471  
Retained earnings - substantially restricted
    48,170       45,494  
Accumulated other comprehensive income
    7,852       6,336  
Treasury stock, 181,734 and 226,132 common shares, at cost, at December 31, 2011 and September 30, 2011, respectively
    (3,033 )     (3,758 )
Total stockholders’ equity
    85,558       80,577  
                 
Total liabilities and stockholders’ equity
  $ 1,359,205     $ 1,275,481  

See Notes to Condensed Consolidated Financial Statements.

 
1

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)

   
Three Months Ended
 
   
December 31,
 
             
   
2011
   
2010
 
             
Interest and dividend income:
           
Loans receivable, including fees
  $ 4,540     $ 5,447  
Mortgage-backed securities
    4,787       3,918  
Other investments
    288       255  
      9,615       9,620  
Interest expense:
               
Deposits
    653       889  
FHLB advances and other borrowings
    324       453  
      977       1,342  
                 
Net interest income
    8,638       8,278  
                 
Provision for loan losses
    699       (28 )
                 
Net interest income after provision for loan losses
    7,939       8,306  
                 
Non-interest income:
               
Card fees
    13,913       14,011  
Gain on sale of securities available for sale, net
    1,050       526  
Loan fees
    329       201  
Deposit fees
    162       181  
Bank-owned life insurance income
    128       133  
Other income
    100       254  
Total non-interest income
    15,682       15,306  
                 
Non-interest expense:
               
Compensation and benefits
    7,176       7,796  
Card processing expense
    5,322       5,223  
Occupancy and equipment expense
    2,098       2,042  
Goodwill impairment
    -       1,566  
Legal and consulting expense
    1,266       1,411  
Data processing expense
    275       273  
Marketing
    167       261  
Other expense
    2,487       3,046  
Total non-interest expense
    18,791       21,618  
                 
                 
Income before income tax expense
    4,830       1,994  
                 
Income tax expense
    1,739       1,273  
Net income
  $ 3,091     $ 721  
                 
Earnings per common share:
               
Basic
  $ 0.97     $ 0.23  
Diluted
  $ 0.97     $ 0.23  

See Notes to Condensed Consolidated Financial Statements.

 
2

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)

   
Three Months Ended
 
   
December 31,
 
             
   
2011
   
2010
 
             
             
Net income
  $ 3,091     $ 721  
                 
Other comprehensive income (loss):
               
Change in net unrealized gains (losses) on securities available for sale
    3,504       (2,218 )
Gains realized in net income
    (1,050 )     (526 )
      2,454       (2,744 )
Deferred income tax effect
    938       (1,048 )
Total other comprehensive income (loss)
    1,516       (1,696 )
Total comprehensive income (loss)
  $ 4,607     $ (975 )

See Notes to Condensed Consolidated Financial Statements.

 
3

 
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended December 31, 2011 and 2010
(Dollars in Thousands, Except Share and Per Share Data)

                     
Accumulated
             
         
Additional
         
Other
         
Total
 
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
Stockholders’
 
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
 
                                     
Balance, September 30, 2010
  $ 34     $ 32,381     $ 42,475     $ 1,599     $ (4,445 )   $ 72,044  
                                                 
Cash dividends declared on common stock ($.13 per share)
    -       -       (405 )     -       -       (405 )
                                                 
Issuance of 1,050 common shares from treasury stock due to issuance of restricted stock
    -       13       -       -       23       36  
                                                 
Stock compensation
    -       25       -       -       -       25  
                                                 
Change in net unrealized losses on securities available for sale
    -       -       -       (1,696 )     -       (1,696 )
                                                 
Net income
    -       -       721       -       -       721  
                                                 
Balance, December 31, 2010
  $ 34     $ 32,419     $ 42,791     $ (97 )   $ (4,422 )   $ 70,725  
                                                 
Balance, September 30, 2011
  $ 34     $ 32,471     $ 45,494     $ 6,336     $ (3,758 )   $ 80,577  
                                                 
Cash dividends declared on common stock ($.13 per share)
    -       -       (415 )     -       -       (415 )
                                                 
Issuance of 44,398 common shares from treasury stock due to issuance of restricted stock
    -       51       -       -       725       776  
                                                 
Stock compensation
    -       13       -       -       -       13  
                                                 
Change in net unrealized gains on securities available for sale
    -       -       -       1,516       -       1,516  
                                                 
Net income
    -       -       3,091       -       -       3,091  
                                                 
Balance, December 31, 2011
  $ 34     $ 32,535     $ 48,170     $ 7,852     $ (3,033 )   $ 85,558  

See Notes to Condensed Consolidated Financial Statements.

 
4

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

   
Three Months Ended December 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net income
  $ 3,091     $ 721  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion, net
    2,864       2,576  
Disbursement of non-real estate consumer loans originated for sale
    (304,066 )     (331,151 )
Proceeds from sale of non-real estate consumer loans
    304,717       329,370  
Disbursement of 1-4 family residential mortgage loans originated for sale
    -       (1,022 )
Proceeds from sale of 1-4 family residential mortgage loans
    373       2,176  
Loss (gain) on sale of loans
    2       (111 )
Provision for loan losses
    699       (28 )
Gain on sale of other assets
    (13 )     -  
Gain on sale of securities available for sale, net
    (1,050 )     (526 )
Net change in accrued interest receivable
    (309 )     429  
Net change in other assets
    812       216  
Net change in accrued interest payable
    (16 )     (137 )
Net change in accrued expenses and other liabilities
    (3,813 )     (1,042 )
Net cash provided by operating activities
    3,291       1,471  
                 
Cash flow from investing activities:
               
Purchase of securities available for sale
    (277,388 )     (73,092 )
Net change in federal funds sold
    -       (6,236 )
Proceeds from sales of securities available for sale
    45,595       21,296  
Proceeds from maturities and principal repayments of securities available for sale
    39,738       35,192  
Loans purchased
    (4,188 )     (1,039 )
Net change in loans receivable
    (2,651 )     25,365  
Proceeds from sales of foreclosed real estate
    350       104  
Net change in Federal Home Loan Bank stock
    (6,007 )     312  
Proceeds from the sale of premises and equipment
    30       -  
Purchase of premises and equipment
    (789 )     (395 )
Other, net
    (938 )     1,048  
Net cash (used in) provided by investing activities
    (206,248 )     2,555  
                 
Cash flows from financing activities:
               
Net change in checking, savings, and money market deposits
    93,065       135,857  
Net change in time deposits
    (9,889 )     (31,094 )
Net change in securities sold under agreements to repurchase
    (604 )     (2,376 )
Cash dividends paid
    (415 )     (405 )
Stock compensation
    13       25  
Proceeds from exercise of stock options
    776       36  
Net cash provided by financing activities
    82,946       102,043  
                 
Net change in cash and cash equivalents
    (120,011 )     106,069  
                 
Cash and cash equivalents at beginning of period
    276,893       87,503  
Cash and cash equivalents at end of period
  $ 156,882     $ 193,572  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for:
               
Interest
  $ 993     $ 1,479  
Income taxes
    1,442       1,075  
                 
Supplemental schedule of non-cash investing and financing activities:
               
Loans transferred to foreclosed real estate
  $ 1,720     $ -  

See Notes to Condensed Consolidated Financial Statements.

 
5

 
META FINANCIAL GROUP, INC. ®
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1.  BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2011 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 20, 2011.  Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended December 31, 2011, are not necessarily indicative of the results expected for the year ending September 30, 2012.
 
NOTE 2.  CREDIT DISCLOSURES

Loans are considered impaired if full principal or interest payments are not probable in accordance with the contractual loan terms.  Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the provision for loan losses.

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

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

 
6

 
Loan receivables at December 31, 2011 and September 30, 2011 are as follows:

   
December 31, 2011
   
September 30, 2011
 
   
(Dollars in Thousands)
 
             
One to four family residential mortgage loans
  $ 37,506     $ 33,753  
One to four family residential mortgage loans held for sale
    -       375  
Commercial and multi-family real estate loans
    194,444       194,414  
Agricultural real estate loans
    20,070       20,320  
Consumer loans
    34,359       32,418  
Consumer loans held for sale
    1,362       1,980  
Commercial business loans
    12,640       14,955  
Agricultural business loans
    22,071       21,200  
Total Loans Receivable
    322,452       319,415  
                 
Less:
               
Allowance for loan losses
    (4,565 )     (4,926 )
Net deferred loan origination fees
    (83 )     (79 )
Total Loans Receivable, Net
  $ 317,804     $ 314,410  

Activity in the allowance for loan losses for the three month period ended December 31, 2011 and 2010 are as follows:

   
Three Months Ended
 
   
December 31,
 
(Dollars in Thousands) 
 
2011
   
2010
 
             
             
Beginning balance
  $ 4,926     $ 5,234  
Provision for loan losses
    699       (28 )
Charge-offs
    (1,069 )     (515 )
Recoveries
    9       72  
Ending balance
  $ 4,565     $ 4,763  

 
7

 
Allowance for loan losses and loans receivable at December 31, 2011 and 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 December 31, 2011
                                               
                                                 
Allowance for loan losses:
                                               
Beginning balance
  $ 165     $ 3,901     $ -     $ 16     $ 36     $ 67     $ 741     $ 4,926  
Provision charged (credited) to expense
    15       775       -       3       (2 )     (2 )     (90 )     699  
Losses charged off
    -       (1,067 )     -       (2 )     -       -       -       (1,069 )
Recoveries
    1       -       -       4       4       -       -       9  
Ending balance
  $ 181     $ 3,609     $ -     $ 21     $ 38     $ 65     $ 651     $ 4,565  
                                                                 
                                                                 
Ending balance: individually evaluated for impairment
  $ 11     $ 1,425     $ -     $ -     $ 3     $ -     $ -     $ 1,439  
Ending balance: collectively evaluated for impairment
  $ 170     $ 2,184     $ -     $ 21     $ 35     $ 65     $ 651     $ 3,126  
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:
                                                               
Ending balance: individually evaluated for impairment
  $ 178     $ 14,608     $ -     $ -     $ 91     $ -     $ -     $ 14,877  
Ending balance: collectively evaluated for impairment
  $ 37,328     $ 179,836     $ 20,070     $ 34,359     $ 12,549     $ 22,071     $ -     $ 306,213  
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

   
1-4 Family Residential
   
Commercial and Multi Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Business
   
Agricultural Operating
   
Unallocated
   
Total
 
                                                 
Three Months Ended December 31, 2010
                                               
                                                 
Allowance for loan losses:
                                               
Beginning balance
  $ 50     $ 3,053     $ 111     $ 738     $ 131     $ 125     $ 1,026     $ 5,234  
Provision charged to expense
    (3 )     136       (86 )     60       (21 )     (23 )     (91 )     (28 )
Losses charged off
    -       (15 )     -       (500 )     -       -       -       (515 )
Recoveries
    -       -       -       72       -       -       -       72  
Ending balance
  $ 47     $ 3,174     $ 25     $ 370     $ 110     $ 102     $ 935     $ 4,763  
                                                                 
Ending balance: individually evaluated for impairment
  $ 47     $ 877     $ 19     $ 1     $ 17     $ -     $ -     $ 961  
Ending balance: collectively evaluated for impairment
  $ -     $ 2,297     $ 6     $ 369     $ 93     $ 102     $ 935     $ 3,802  
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:
                                                               
Ending balance: individually evaluated for impairment
  $ 137     $ 7,888     $ 1,826     $ 5     $ 113     $ -     $ -     $ 9,969  
Ending balance: collectively evaluated for impairment
  $ 38,013     $ 193,123     $ 19,081     $ 42,238     $ 16,814     $ 28,107     $ -     $ 337,376  
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by our regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality, as “substandard,” “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the savings association will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

 
8

 
General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” MetaBank (the “Bank”) is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, who may order the establishment of additional general or specific loss allowances.

The asset classification at December 31, 2011 and September 30, 2011 are as follows:

December 31, 2011
                                   
   
1-4 Family Residential
   
Commercial and Multi Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Business
   
Agricultural Operating
 
                                     
Pass
  $ 37,226     $ 167,063     $ 20,070     $ 34,073     $ 11,345     $ 15,594  
Watch
    263       7,386       -       164       715       6,477  
Special Mention
    17       598       -       1       331       -  
Substandard
    -       19,371       -       91       249       -  
Doubtful
    -       26       -       30       -       -  
    $ 37,506     $ 194,444     $ 20,070     $ 34,359     $ 12,640     $ 22,071  

September 30, 2011
                                   
   
1-4 Family Residential
   
Commercial and Multi Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Business
   
Agricultural Operating
 
                                     
Pass
  $ 33,830     $ 161,109     $ 20,320     $ 31,967     $ 13,737     $ 14,500  
Watch
    281       10,446       -       318       913       6,700  
Special Mention
    17       3,006       -       38       53       -  
Substandard
    -       19,827       -       60       252       -  
Doubtful
    -       26       -       35       -       -  
    $ 34,128     $ 194,414     $ 20,320     $ 32,418     $ 14,955     $ 21,200  

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.

 
9

 
The Company currently offers one, three, five, seven and ten year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually.  These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as is the Company's cost of funds.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed rate residential loans.  Current market conditions make ARM loans 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.  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 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.

 
10

 
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” (generally referring to traditional banking operations in our four market areas) offers a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Retail Bank offers other secured and unsecured consumer loans.  The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas.  The Retail Bank originates consumer loans on both a direct and indirect basis.

The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail Bank will lend amounts which, together with all prior liens, typically may be up to 100% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.

The Retail Bank primarily originates automobile loans on a direct basis, but also originates indirect automobile loans on a very limited basis.  Direct loans are loans made when the Retail Bank extends credit directly to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers.  The Retail Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles.  Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

 
11



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.

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.

 
12

 
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 taken out of 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.  Past due loans at December 31, 2011 and September 30, 2011 are as follows:

December 31, 2011
 
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
  $ 347     $ -     $ -     $ 347     $ 36,981     $ 178     $ 37,506  
Commercial Real Estate and Multi Family
    1,631       -       -       1,631       182,575       10,238       194,444  
Agricultural Real Estate
    -       -       -       -       20,070       -       20,070  
Consumer
    28       44       23       95       34,264       -       34,359  
Commercial Operating
    -       -       -       -       12,615       25       12,640  
Agricultural Operating
    -       -       -       -       22,071       -       22,071  
Total
  $ 2,006     $ 44     $ 23     $ 2,073     $ 308,576     $ 10,441     $ 321,090  
                                                         
September 30, 2011
                                                       
                                                         
Residential 1-4 Family
  $ 51     $ 30     $ -     $ 81     $ 33,920     $ 127     $ 34,128  
Commercial Real Estate and Multi Family
    2,460       -       -       2,460       178,929       13,025       194,414  
Agricultural Real Estate
    -       -       -       -       20,320       -       20,320  
Consumer
    26       14       24       64       32,354       -       32,418  
Commercial Operating
    -       -       -       -       14,925       30       14,955  
Agricultural Operating
    -       -       -       -       21,200       -       21,200  
Total
  $ 2,537     $ 44     $ 24     $ 2,605     $ 301,648     $ 13,182     $ 317,435  
 
 
Impaired loans at December 31, 2011 and September 30, 2011 are as follows:

   
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
December 31, 2011
                             
                               
Loans without a specific valuation allowance
                             
Residential 1-4 Family
  $ -     $ -     $ -     $ -     $ -  
Commercial Real Estate and Multi Family
    -       -       -       -       -  
Agricultural Real Estate
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Commercial Operating
    -       -       -       -       -  
Agricultural Operating
    -       -       -       -       -  
Total
  $ -     $ -     $ -     $ -     $ -  
Loans with a specific valuation allowance
                                       
Residential 1-4 Family
  $ 178     $ 232     $ 11     $ 145     $ -  
Commercial Real Estate and Multi Family
    14,608       20,043       1,425       11,401       -  
Agricultural Real Estate
    -       -       -       646       -  
Consumer
    -       -       -       11       -  
Commercial Operating
    91       134       3       78       -  
Agricultural Operating
    -       -       -       -       -  
Total
  $ 14,877     $ 20,409     $ 1,439     $ 12,281     $ -  

   
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
September 30, 2011
                             
                               
Loans without a specific valuation allowance
                             
Residential 1-4 Family
  $ -     $ -     $ -     $ -     $ -  
Commercial Real Estate and Multi Family
    -       -       -       -       -  
Agricultural Real Estate
    -       -       -       -       -  
Consumer
    -       -       -       -       -  
Commercial Operating
    -       -       -       -       -  
Agricultural Operating
    -       -       -       -       -  
Total
  $ -     $ -     $ -     $ -     $ -  
Loans with a specific valuation allowance
                                       
Residential 1-4 Family
  $ 127     $ 172     $ 1     $ 117     $ -  
Commercial Real Estate and Multi Family
    13,025       18,427       1,845       9,306       -  
Agricultural Real Estate
    -       -       -       1,176       -  
Consumer
    -       -       -       36       -  
Commercial Operating
    30       45       3       109       -  
Agricultural Operating
    -       -       -       80       -  
Total
  $ 13,182     $ 18,644     $ 1,849     $ 10,824     $ -  

 
14

 
The Company’s troubled debt restructurings (“TDR”) (which involved forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates) are included in the table. Loans modified as TDR loans during the period ended December 31, 2011 and 2010 are as follows:

   
For the Three Months Ended December 31, 2011
   
For the Three Months Ended December 31, 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
    -     $ -     $ -       -     $ -     $ -  
Commercial Real Estate and Multi Family
    -       -       -       -       -       -  
Agricultural Real Estate
    -       -       -       -       -       -  
Consumer
    -       -       -       -       -       -  
Commercial Operating
    -       -       -       -       -       -  
Agricultural Operating
    -       -       -       -       -       -  
Total
    -     $ -     $ -       -     $ -     $ -  

The following table provides information on TDR loans for which there was a payment default during the three month period ending December 31, 2011 and 2010, that had been modified during the 12-month period prior to the default:

   
With Payment Defaults During the Following Periods
 
   
For the Three Month Period Ended
   
For the Three Month Period Ended
 
   
December 31, 2011
   
December 31, 2010
 
   
Number of Loans
   
Recorded Investment
   
Number of Loans
   
Recorded Investment
 
Residential 1-4 Family
    -     $ -       -     $ -  
Commercial Real Estate and Multi Family
    -       -       -       -  
Agricultural Real Estate
    -       -       -       -  
Consumer
    -       -       -       -  
Commercial Operating
    -       -       -       -  
Agricultural Operating
    -       -       -       -  
Total