META FINANCIAL GROUP INC, 10-Q filed on 8/5/2011
Quarterly Report
Document And Entity Information (USD $)
9 Months Ended
Jun. 30, 2011
Aug. 5, 2011
Mar. 31, 2010
Entity Registrant Name
META FINANCIAL GROUP INC 
 
 
Entity Central Index Key
0000907471 
 
 
Current Fiscal Year End Date
--09-30 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Public Float
 
 
$ 55,600,000 
Entity Common Stock, Shares Outstanding
 
3,117,363 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Type
10-Q 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Condensed Consolidated Statements of Financial Condition (Unaudited) (USD $)
In Thousands
Jun. 30, 2011
Sep. 30, 2010
ASSETS
 
 
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
 
 
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
0 
0 
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 
Condensed Consolidated Statements of Financial Condition (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data
Jun. 30, 2011
Sep. 30, 2010
ASSETS
 
 
Loans receivable - allowance for loan losses
$ 4,882 
$ 5,234 
SHAREHOLDERS' EQUITY
 
 
Preferred stock, authorized (in shares)
800,000 
800,000 
Preferred stock, issued (in shares)
0 
0 
Preferred stock, outstanding (in shares)
0 
0 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized (in shares)
5,200,000 
5,200,000 
Common stock, issued (in shares)
3,372,999 
3,372,999 
Common stock, outstanding (in shares)
3,117,363 
3,111,413 
Treasury stock, shares (in shares)
255,636 
261,586 
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30,		 9 Months Ended
Jun. 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 
Total interest and dividend income
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 
Total interest expense
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
0 
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
0 
0 
1,508 
0 
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 (in dollars per share)
$ (0.33)
$ 1.15 
$ 0.79 
$ 3.44 
Diluted (in dollars per share)
$ (0.33)
$ 1.11 
$ 0.79 
$ 3.37 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands
3 Months Ended
Jun. 30,		 9 Months Ended
Jun. 30,
2011
2010
2011
2010
Condensed Consolidated Statements of Comprehensive Income (Unaudited) [Abstract]
 
 
 
 
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
0 
239 
1,158 
2,093 
Total available for sale adjustment
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 
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss), Net of Tax [Member]
Treasury Stock [Member]
Balance at Sep. 30, 2009
$ 47,345 
$ 30 
$ 23,551 
$ 31,626 
$ (1,838)
$ (6,024)
Cash dividends declared on common stock
(1,142)
0 
0 
(1,142)
0 
0 
Issuance of common shares from the sales of equity securities
8,567 
4 
8,563 
0 
0 
0 
Issuance of common shares from treasury stock due to issuance of restricted stock and exercise of stock options
622 
0 
(272)
0 
0 
894 
Stock compensation
(69)
0 
(69)
0 
0 
0 
Change in net unrealized losses on securities available for sale
4,570 
0 
0 
0 
4,570 
0 
Net income
9,904 
0 
0 
9,904 
0 
0 
Balance at Jun. 30, 2010
69,797 
34 
31,773 
40,388 
2,732 
(5,130)
Balance at Sep. 30, 2010
72,044 
34 
32,381 
42,475 
1,599 
(4,445)
Cash dividends declared on common stock
(1,216)
0 
0 
(1,216)
0 
0 
Issuance of common shares from treasury stock due to issuance of restricted stock and exercise of stock options
113 
0 
(10)
0 
0 
123 
Stock compensation
61 
0 
61 
0 
0 
0 
Change in net unrealized losses on securities available for sale
4,614 
0 
0 
0 
4,614 
0 
Net income
2,448 
0 
0 
2,448 
0 
0 
Balance at Jun. 30, 2011
$ 78,064 
$ 34 
$ 32,432 
$ 43,707 
$ 6,213 
$ (4,322)
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parenthetical) (USD $)
9 Months Ended
Jun. 30,
2011
2010
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Parenthetical [Abstract]
 
 
Cash dividends declared on common stock (in dollars per share)
$ 0.39 
$ 0.39 
Issuance of common shares from the sales of equity securities (in shares)
 
415,000 
Issuance of common shares from treasury stock due to issuance of restricted stock and exercise of stock options (in shares)
5,950 
23,287 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
9 Months Ended
Jun. 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 
0 
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
0 
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
0 
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 
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 
BASIS OF PRESENTATION
BASIS OF PRESENTATION
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.
CREDIT DISCLOSURES
CREDIT DISCLOSURES
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
  -   -   -   -   -   - 
ALLOWANCE FOR LOAN LOSSES
ALLOWANCE FOR LOAN LOSSES
NOTE 3.  ALLOWANCE FOR LOAN LOSSES

At June 30, 2011, the Company's allowance for loan losses was $4.9 million, a decrease of $0.3 million from $5.2 million at September 30, 2010.  During the nine months ended June 30, 2011 the Company recorded a provision for loan losses of $0.1 million.
 
During the nine months ended June 30, 2011, the Company recorded a retail bank provision in the amount of $0.4 million due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans.

During the three months ended June 30, 2011, the Company recorded a negative provision for loan losses in the amount of $0.2 million, consisting of a negative provision of $0.3 million related to the discontinuance of the MPS iAdvance loan program and a provision of $0.1 million primarily related to increases in non-performing loans.  The Company's total net charge-offs for the three and nine months ended June 30, 2011 were a net recovery of $0.3 million and a net charge-off of $0.4 million, respectively.  Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Losses” in Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets and non-performing loans, the composition of its loan portfolio and the general economic environment within which the Company and its borrowers operate.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses.

EARNINGS PER COMMON SHARE (EPS)
EARNINGS PER COMMON SHARE (EPS)
NOTE 4.  EARNINGS PER COMMON SHARE (“EPS”)

Basic EPS is computed by dividing income (loss) available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.

A reconciliation of the income and common stock share amounts used in the computation of basic and diluted EPS for the three and nine months ended June 30, 2011 and 2010 is presented below.
 
Three Months Ended June 30,
 
2011
  
2010
 
(Dollars in Thousands, Except Share and Per Share Data)
      
        
Earnings
      
Net Income (Loss)
 $(1,020) $3,538 
          
Basic EPS
        
Weighted average common shares outstanding
  3,117,363   3,080,242 
Less weighted average unallocated ESOP and nonvested shares
  (1,667)  (3,334)
Weighted average common shares outstanding
  3,115,696   3,076,908 
          
Earnings (Loss) Per Common Share
        
Basic
 $(0.33) $1.15 
          
Diluted EPS
        
Weighted average common shares outstanding for basic earnings per common share
  3,115,696   3,076,908 
Add dilutive effect of assumed exercises of stock options, net of tax benefits
  617   101,740 
Weighted average common and dilutive potential common shares outstanding
  3,116,313   3,178,648 
          
Earnings (Loss) Per Common Share
        
Diluted
 $(0.33) $1.11 
 
Nine Months Ended June 30,
 
2011
  
2010
 
(Dollars in Thousands, Except Share and Per Share Data)
      
        
Earnings
      
Net Income
 $2,448  $9,904 
          
Basic EPS
        
Weighted average common shares outstanding
  3,114,954   2,885,665 
Less weighted average unallocated ESOP and nonvested shares
  (1,667)  (3,334)
Weighted average common shares outstanding
  3,113,287   2,882,331 
          
Earnings Per Common Share
        
Basic
 $0.79  $3.44 
          
Diluted EPS
        
Weighted average common shares outstanding for basic earnings per common share
  3,113,287   2,882,331 
Add dilutive effect of assumed exercises of stock options, net of tax benefits
  -   58,315 
Weighted average common and dilutive potential common shares outstanding
  3,113,287   2,940,646 
          
Earnings Per Common Share
        
Diluted
 $0.79  $3.37 
 
Stock options totaling 451,640 and 406,776 were not considered in computing diluted EPS for the three and nine months ended June 30, 2011, respectively, because they were not dilutive.  Stock options totaling 75,433 and 174,827 were not considered in computing diluted EPS for the three and nine months ended June 30, 2010, respectively, because they were not dilutive.  The calculation of the diluted EPS for the nine months ended June 30, 2011 does not reflect the assumed exercise of 5,270 stock options because the effect would have been anti-dilutive for the period.
SECURITIES
SECURITIES
NOTE 5.  SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale securities at June 30, 2011 and September 30, 2010 are presented below.

      
GROSS
  
GROSS
    
   
AMORTIZED
  
UNREALIZED
  
UNREALIZED
  
FAIR
 
June 30, 2011
 
COST
  
GAINS
  
(LOSSES)
  
VALUE
 
   
(Dollars in Thousands)
 
Debt securities
            
Trust preferred and corporate securities
 $24,974  $200  $(4,096) $21,078 
Obligations of states and political subdivisions
  5,838   124   (23)  5,939 
Mortgage-backed securities
  588,244   14,163   (316)  602,091 
Total debt securities
 $619,056  $14,487  $(4,435) $629,108 
                  
                  
       
GROSS
  
GROSS
     
   
AMORTIZED
  
UNREALIZED
  
UNREALIZED
  
FAIR
 
September 30, 2010
 
COST
  
GAINS
  
(LOSSES)
  
VALUE
 
   
(Dollars in Thousands)
 
Debt securities
                
Trust preferred and corporate securities
 $25,466  $7  $(7,922) $17,551 
Obligations of states and political subdivisions
  3,769   155   (8)  3,916 
Mortgage-backed securities
  475,026   10,671   (312)  485,385 
Total debt securities
 $504,261  $10,833  $(8,242) $506,852 
 
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at June 30, 2011 and September 30, 2010 are as follows:

   
LESS THAN 12 MONTHS
  
OVER 12 MONTHS
  
TOTAL
 
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
June 30, 2011
 
Value
  
(Losses)
  
Value
  
(Losses)
  
Value
  
(Losses)
 
   
(Dollars in Thousands)
 
Debt securities
                  
Trust preferred and corporate securities
 $-  $-  $20,728  $(4,096) $20,728  $(4,096)
Obligations of states and political subdivisions
  1,893   (23)  -   -  $1,893  $(23)
Mortgage-backed securities
  68,078   (316)  -   -   68,078   (316)
Total debt securities
 $69,971  $(339) $20,728  $(4,096) $90,699  $(4,435)
                          
                          
   
LESS THAN 12 MONTHS
  
OVER 12 MONTHS
  
TOTAL
 
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
September 30, 2010
 
Value
  
(Losses)
  
Value
  
(Losses)
  
Value
  
(Losses)
 
   
(Dollars in Thousands)
 
Debt securities
                        
Trust preferred and corporate securities
 $-  $-  $17,551  $(7,922) $17,551  $(7,922)
Obligations of states and political subdivisions
  1,110   (8)  -   -   1,110   (8)
Mortgage-backed securities
  67,227   (312)  -   -   67,227   (312)
Total debt securities
 $68,337  $(320) $17,551  $(7,922) $85,888  $(8,242)

The Company's management reviews the status and potential impairment of the trust preferred securities on a monthly basis.  In its review, management discusses duration of unrealized losses and reviews credit rating changes.  Other factors, but not necessarily all, considered are: that the risk of loss is minimized and easier to determine due to the single-issuer, rather than pooled, nature of the securities, the condition of the six banks listed, and whether there have been any payment deferrals or defaults to-date.  Such factors are subject to change over time.

At June 30, 2011, the investment portfolio included securities with current unrealized losses which have existed for longer than one year.  All of these securities are considered to be acceptable credit risks.  Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, no other-than-temporary impairment was recorded at June 30, 2011.  In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
NOTE 6.  COMMITMENTS AND CONTINGENCIES

At June 30, 2011 and September 30, 2010, the Company had outstanding commitments to originate and purchase loans and unused lines of credit totaling $37.5 million and $37.8 million, respectively.  It is expected that outstanding loan commitments will be funded with existing liquid assets.  At June 30, 2011, the Company had no commitments to purchase or sell securities available for sale.
 
Legal Proceedings

Lawsuits against MetaBank involving the sale of purported MetaBank certificates of deposit continue to be addressed.  In all, nine cases have been filed to date, and of those nine, three have been dismissed, and four have been settled for payments that the Company deemed reasonable under the circumstances, including the costs of litigation.  Of the two remaining cases, one is a class action case.  On May 5, 2010, in that class action, Guardian Angel Credit Union v. MetaBank et al., Case No. 08-cv-261-PB (USDC, District of NH), the court granted the plaintiff's motion to certify the class. Recently, both parties filed motions for summary judgment in this matter.  The court denied the plaintiffs' motion for summary judgment in its entirety, and denied the defendants' motion with regard to the contract and negligent supervision causes of action.  The court did grant defendants' motion for summary judgment with regard to the vicarious liability cause of action and the plaintiffs' claim for attorneys' fees.  In a separate motion, the court denied plaintiffs' motion to amend the complaint to include a claim for punitive damages.  The court has ordered the parties to attend a mediation session before the magistrate judge assigned to the case in September 2011.  The court has tentatively scheduled the case for trial in December 2011. Additionally, a lawsuit relating to this matter has been filed by Airline Pilots Assoc Federal Credit Union in the Iowa District court for Polk County, Case No. CL-118792.  The underlying matter was first disclosed in the Company's quarterly report for the period ended December 31, 2007, which stated that an employee of the Bank had sold fraudulent CDs for her own benefit.  The unauthorized and illegal actions of the employee have since prompted a number of demands and lawsuits seeking recovery on the fraudulent CDs to be filed against the Bank, which have been disclosed in subsequent filings.  The employee was prosecuted, convicted and, on June 2, 2010, sentenced to more than seven years in federal prison and ordered to pay more than $4 million in restitution.  Notwithstanding the nature of her crimes, which were unknown by the Bank and its management, plaintiffs in the two remaining cases seek to impose liability on the Bank under a number of legal theories with respect to the remaining $3.6 million of fraudulent CDs that were issued by the former employee.  The Bank and its insurer, which has assumed defense of the action and which is advancing defense costs subject to a reservation of rights, continue to vigorously contest liability in the remaining actions.  The Company's estimate of a range of possible losses is approximately $0 to $0.4 million as of the filing date of this report.
 
Cedar Rapids Bank & Trust Company v MetaBank, Case No. LACV007196.  In a separate matter, on November 3, 2009, Cedar Rapids Bank & Trust Company ("CRBT") filed a Petition against MetaBank in the Iowa District Court in and for Linn County claiming an unspecified amount of money damages against MetaBank arising from CRBT's participation in loans originated by MetaBank to companies owned or controlled by Dan Nelson.  The complaint states that the Nelson companies eventually filed for bankruptcy and the loans, including CRBT's portion, were not fully repaid.  Under a variety of theories, CRBT claims that MetaBank had material negative information about Dan Nelson, his companies and the loans that it did not share with CRBT prior to CRBT taking a participation interest.  MetaBank believes that CRBT's loss of principal was limited to approximately $0.2 million, and in any event intends to vigorously defend the case.   The Company's estimate of a range of losses is approximately $0 to $0.2 million as of the filing date of this report.

In re Meta Financial Group, Inc., Securities Litigation, No. 10-4108-MWB.  In October and November, 2010, former stockholders Thirumalesh Bhat and Alaa M. Elgaouni filed separate purported class action lawsuits in the United States District Court for the Northern District of Iowa against the Company and certain of its officers alleging violations of certain federal securities laws.  The lawsuits, which purport to be brought on behalf of those who purchased the Company's stock between May 14, 2009 and October 15, 2010, allege that the Company and the named officers violated Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5 in connection with certain allegedly false and misleading public statements allegedly made during this period by the Company and its officers.  On December 15, 2010, Mr. Bhat voluntarily dismissed his complaint.  In the remaining matter, renamed by the Court as In re Meta Financial Group, Inc., Securities Litigation, former stockholder Eden Partnership was named lead plaintiff on January 12, 2011.  On April 11, 2011, Defendants moved to dismiss all claims against them, but on July 18, 2011, the Court denied the motion.  The matter will now move into the discovery phase. The complaint does not specify an amount of damages sought. The Company denies the allegations in the complaint and intends to vigorously pursue its defense.  An estimate of the Company's possible loss cannot be made because of the early stage of the litigation.
 
In addition to the three previously disclosed ATM lawsuits filed in 2011, there have been three additional lawsuits recently filed in the 2011 fiscal third quarter concerning automated teller machines sponsored by MetaBank, each involving claims that a notification required to be placed upon an automated teller machine was absent on a specific date, in violation of Regulation E of the Electronic Fund Transfer Act:  Brendan McInerney, Individually and on Behalf of All Others Similarly Situated, v. MetaBank, Meta Payment Systems, and Does 1-10, inclusive, Case No. 1:11-cv-1522-BTM-NLS, filed in the United States District Court for the Southern District of California; Frank Johnson, Individually and on Behalf of All Others Similarly Situated, v. MetaBank, Meta Payment Systems, and Does 1-10, inclusive, Case No. 1:11-cv-01561-WQH-BLM, filed in the United States District Court for the Southern District of California; and Karen Cole, individually and on behalf of all others similarly situated, v. Automated Financial, LLC, MetaBank dba Meta Payment Systems, a division of MetaBank, Case No. 3:11-cv-03299, filed in the United States District Court for the Northern District of Illinois.  The Company denies liability in these matters, and will contest these lawsuits with the ATM operators, which are each obligated to indemnify the Company for losses, costs and expenses in these matters.  The Company's possible loss cannot be estimated at this stage of the litigation because the extent of the Company's indemnification by the ATM operators is unknown.
 
Patrick Finn and Light House Management Group, Inc. as Receiver for First United Funding, LLC and Corey N. Johnson v. MetaBank etal, Case 5:11-cv-04041.  On May 4, 2011, Patrick Finn and Light House Management Group, Inc. as Receivers for First United Funding, LLC and Corey N. Johnson (“Receivers”) filed a Complaint against MetaBank in the United States District Court for the Northern District of Iowa requesting judgment avoiding approximately $1.5 million of transfers that allegedly resulted in a profit to MetaBank arising from MetaBank's participation in loans originated by First United Funding, LLC.  Similar complaints have been filed by the Receivers against other lenders who purchased participation interests in the same or similar loans originated by First United Funding, LLC.  The complaint states that First United Funding, LLC and Corey N. Johnston were involved in a criminal enterprise to defraud creditors.  Under a variety of theories, Receivers claim that loan repayments to MetaBank constitute fraudulent transfers and MetaBank was unjustly enriched to the detriment of these creditors.  MetaBank intends to vigorously defend the case.   The Company's estimate of a range of losses is approximately $0 to $0.5 million as of the filing date of this report.

See Note 12 –Regulatory Matters and Settlement of OTS Enforcement Actions for a discussion of the settlement of OTS enforcement matters and on-going compliance matters.

The Bank utilizes various third parties for, among other things, its processing needs, both with respect to standard bank operations and with respect to its MPS division.  MPS was notified in April 2008 by one of the processors that the processor's computer system had been breached, which led to the unauthorized load and spending of funds from Bank-issued cards.  The Bank believes the amount in question to be approximately $2.0 million.  The processor and program manager both have agreements with the Bank to indemnify it for any losses as a result of such unauthorized activity, and the matter is reflected as such in its financial statements.  In addition, the Bank has given notice to its own insurer.  The Bank has been notified by the processor that its insurer has denied the claim filed.  The Bank made demand for payment and filed a demand for arbitration to recover the unauthorized loading and spending amounts and certain damages.  The Bank has settled its claim with the program manager, and has received an arbitration award against the processor.  That arbitration has been entered as a judgment in the State of South Dakota, which judgment has been transferred to Florida for garnishment proceedings against the processor and its insurer.  The Company's estimate of a range of losses is approximately $0 to $0.5 million as of the filing date of this report.

Certain corporate clients of an unrelated company named Springbok Services, Inc. requested through counsel a mediation as a means of reaching a settlement in lieu of commencing litigation against MetaBank.  The results of that mediation have not led to a settlement.  These claimants purchased MetaBank prepaid reward cards from Springbok, prior to Springbok's bankruptcy.  As a result of Springbok's bankruptcy and cessation of business, some of the rewards cards which had been purchased were never activated or funded.  Counsel for these companies have indicated that they are prepared to assert claims totaling approximately $1.5 million against MetaBank based on principal/agency or failure to supervise theories.  The Company denies liability with respect to these claims.  The Company's estimate of a range of losses is approximately $0 to $0.3 million as of the filing date of this report

Other than the matters set forth above, there are no other new material pending legal proceedings or updates to which the Company or its subsidiaries is a party other than ordinary litigation routine to their respective businesses.
STOCK OPTION PLAN
STOCK OPTION PLAN
NOTE 7.  STOCK OPTION PLAN

The Company maintains the 2002 Omnibus Incentive Plan, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company.  Awards are granted by the Stock Option Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

In accordance with ASC 718, Compensation – Stock Compensation, compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant.  The exercise price of options or fair value of nonvested shares granted under the Company's incentive plans is equal to the fair market value of the underlying stock at the grant date.  The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock based incentive awards has been negligible.

A summary of option activity for the nine months ended June 30, 2011 is presented below:

         
Weighted
    
      
Weighted
  
Average
    
   
Number
  
Average
  
Remaining
  
Aggregate
 
   
of
  
Exercise
  
Contractual
  
Intrinsic
 
   
Shares
  
Price
  
Term (Yrs)
  
Value
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
              
Options outstanding, September 30, 2010
  490,993  $23.39   6.49  $4,579 
Granted
  -   -         
Exercised
  -   -         
Forfeited or expired
  (1,000)  23.05         
Options outstanding, June 30, 2011
  489,993  $23.39   5.75  $705 
                  
Options exercisable, June 30, 2011
  468,168  $23.64   5.74  $465 
 
A summary of nonvested share activity for the nine months ended June 30, 2011 is presented below:
     
   
Number of
Shares
  
Weighted
Average Fair
 Value at Grant
 
(Dollars in Thousands, Except Share and Per Share Data) 
         
Nonvested shares outstanding, September 30, 2010
  1,667  $24.43 
Granted
  1,050   31.79 
Vested
  (1,050)  31.79 
Forfeited or expired
  -   - 
Nonvested shares outstanding, June 30, 2011
  1,667  $24.43 
 
At June 30, 2011, stock based compensation expense not yet recognized in income totaled $71,000 which is expected to be recognized over a weighted average remaining period of 0.90 years.
SEGMENT INFORMATION
SEGMENT INFORMATION
NOTE 8.  SEGMENT INFORMATION

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.  The Company has determined that it has two reportable segments.  The first reportable segment, Traditional Banking, consists of its banking subsidiary, MetaBank.  The Bank operates as a traditional community bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located.  MPS, the second reportable segment, provides a number of products and services to financial institutions and other businesses.  These products and services include issuance of prepaid debit cards, such as payroll programs, gift card programs, rebate programs, travel programs and tax related programs, sponsorship of ATMs into the debit networks and credit programs and ACH origination services.  The remaining grouping under the caption “All Others” consists of the operations of Meta Financial Group, Inc. and inter-segment eliminations.  Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices, meaning prices that would be paid if the companies were not affiliates.  The following tables present segment data for the Company for the three and nine months ended June 30, 2011 and 2010, respectively.

   
Traditional
  
Meta Payment
       
   
Banking
  
Systems®
  
All Others
  
Total
 
              
Three Months Ended June 30, 2011
            
Interest income
 $7,157  $2,823  $-  $9,980 
Interest expense
  1,005   33   115   1,153 
Net interest income (loss)
  6,152   2,790   (115)  8,827 
Provision for loan losses
  100   (261)  -   (161)
Non-interest income
  497   8,199   12   8,708 
Non-interest expense
  4,941   14,312   59   19,312 
Income (loss) before tax
  1,608   (3,062)  (162)  (1,616)
Income tax expense (benefit)
  605   (1,135)  (66)  (596)
Net income (loss)
 $1,003  $(1,927) $(96) $(1,020)
                  
Inter-segment revenue (expense)
 $2,332  $(2,332) $-  $- 
Total assets
  317,464   755,058   1,958   1,074,480 
Total deposits
  217,977   710,927   (315)  928,589 
 
   
Traditional
  
Meta Payment
       
   
Banking
  
Systems®
  
All Others
  
Total
 
              
Three Months Ended June 30, 2010
            
Interest income
 $7,261  $2,837  $16  $10,114 
Interest expense
  1,251   91   114   1,456 
Net interest income (loss)
  6,010   2,746   (98)  8,658 
Provision for loan losses
  675   (66)  -   609 
Non-interest income
  550   18,215   28   18,793 
Non-interest expense
  4,720   16,244   195   21,159 
Income (loss) before tax
  1,165   4,783   (265)  5,683 
Income tax expense (benefit)
  450   1,821   (126)  2,145 
Net income (loss)
 $715  $2,962  $(139) $3,538 
                  
Inter-segment revenue (expense)
 $2,093  $(2,093) $-  $- 
Total assets
  417,035   542,169   2,097   961,301 
Total deposits
  231,974   510,875   (1,344)  741,505 
 
   
Traditional
  
Meta Payment
       
   
Banking
  
Systems®
  
All Others
  
Total
 
              
Nine Months Ended June 30, 2011
            
Interest income
 $20,321  $8,853  $6  $29,180 
Interest expense
  3,186   120   352   3,658 
Net interest income (loss)
  17,135   8,733   (346)  25,522 
Provision for loan losses
  400   (375)  -   25 
Non-interest income
  2,906   40,543   35   43,484 
Non-interest expense
  17,159   46,672   350   64,181 
Income (loss) before tax
  2,482   2,979   (661)  4,800 
Income tax expense (benefit)
  1,460   1,150   (258)  2,352 
Net income (loss)
 $1,022  $1,829  $(403) $2,448 
                  
Inter-segment revenue (expense)
 $7,220  $(7,220) $-  $- 
Total assets
  317,464   755,058   1,958   1,074,480 
Total deposits
  217,977   710,927   (315)  928,589 

   
Banking
  
Systems®
  
All Others
  
Total
 
              
Nine Months Ended June 30, 2010
            
Interest income
 $18,869  $10,662  $30  $29,561 
Interest expense
  3,919   307   357   4,583 
Net interest income (loss)
  14,950   10,355   (327)  24,978 
Provision for loan losses
  3,775   11,003   -   14,778 
Non-interest income
  3,525   74,859   83   78,467 
Non-interest expense
  14,545   57,687   596   72,828 
Income (loss) before tax
  155   16,524   (840)  15,839 
Income tax expense (benefit)
  61   6,198   (324)  5,935 
Net income (loss)
 $94  $10,326  $(516) $9,904 
                  
Inter-segment revenue (expense)
 $7,045  $(7,045) $-  $- 
Total assets
  417,035   542,169   2,097   961,301 
Total deposits
  231,974   510,875   (1,344)  741,505 
 
The following tables present gross profit data for MPS for the three and nine months ended June 30, 2011 and 2010, respectively.

        
Three Months Ended June 30,
 
2011
  
2010
 
        
Interest income
 $2,823  $2,837 
Interest expense
  33   91 
Net interest income
  2,790   2,746 
          
Provision for loan losses
  (261)  (66)
Non-interest income
  8,199   18,215 
Card processing expense
  5,878   8,060 
Gross Profit
  5,372   12,967 
          
Other non-interest expense
  8,434   8,184 
          
Income (loss) from operations before tax
  (3,062)  4,783 
Income tax expense (benefit)
  (1,135)  1,821 
Income (loss) from operations
 $(1,927) $2,962 
          
          
Nine Months Ended June 30,
  2011   2010 
          
Interest income
 $8,853  $10,662 
Interest expense
  120   307 
Net interest income
  8,733   10,355 
          
Provision for loan losses
  (375)  11,003 
Non-interest income
  40,543   74,859 
Card processing expense
  19,222   29,897 
Gross Profit
  30,429   44,314 
          
Other non-interest expense
  27,450   27,790 
          
Income from operations before tax
  2,979   16,524 
Income tax expense
  1,150   6,198 
Income from operations
 $1,829  $10,326 
NEW ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
NOTE 9.    NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring
This ASU amends guidance for evaluating whether the restructuring of a receivable by a creditor is a troubled debt restructuring (TDR).  The ASU responds to concerns that creditors are inconsistently applying existing guidance for identifying TDRs.  ASU 2011-02 is effective for a public entity for the first interim or annual period beginning on or after June 15, 2011.  Retrospective application is required for restructurings occurring on or after the beginning of the fiscal year of adoption for purposes of identifying and disclosing TDRs.  However, an entity should apply prospectively changes in the method used to calculate impairment on receivables.  At the same time it adopts ASU 2011-02, a public entity will be required to disclose the activity-based information about TDRs that was previously deferred by ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  The Company will adopt ASU 2011-02 for the interim and annual period ending September 30, 2011 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations, or cash flow.
 
Accounting Standards Update No. 2011-03, Transfer and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements
This ASU applies to all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity (repo arrangements). It focuses the transferor's assessment of effective control on its contractual rights and obligations by removing the requirement to assess its ability to exercise those rights or honor those obligations. When the ASU becomes effective, many entities are likely to account for more types of repo agreements as secured borrowings rather than sales. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011. It is effective prospectively for transactions or modifications of existing transactions that occur on or after the effective date. The Company will adopt ASU 2011-03 for the interim period ending December 31, 2011 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
This ASU was issued concurrently with IFRS 13, Fair Value Measurements, to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.

A public entity is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted.  In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying the ASU and to quantify the total effect, if practicable.  The Company will adopt ASU 2011-04 for the interim period ending December 31, 2011 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations, or cash flow.
 
Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income
This ASU increases the prominence of other comprehensive income in financial statements. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity.

An entity should apply the ASU retrospectively. For a public entity, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company will adopt ASU 2011-05 for the interim period ending December 31, 2011 and the Company does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
NOTE 10. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and expands disclosures about fair value measurement.  It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
 
The fair value hierarchy is as follows:

Level 1 Inputs – Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.

Level 2 Inputs – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in active markets and model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 Inputs – Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available.  These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
 
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities Available for Sale.  Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using an independent pricing service.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government and agency securities that are traded by dealers or brokers in active over-the-counter markets.  The Company had no Level 1 securities at June 30, 2011.  Level 2 securities include agency mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities.
 
The following table summarizes the assets of the Company for which fair values are determined on a recurring basis at June 30, 2011 and September 30, 2010.
 
   
Fair Value at June 30, 2011
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
              
Investment securities available for sale
 $629,108  $-  $629,108  $- 
                  
                  
   
Fair Value at September 30, 2010
 
                  
Investment securities available for sale
 $506,852  $-  $506,852  $- 
 
Included in securities available for sale are trust preferred securities as follows:
 
At June 30, 2011
            
         
Unrealized
 
S&P
Moody
Issuer(1)
 
Book Value
  
Fair Value
  
Gain (Loss)
 
Credit Rating
Credit Rating
   
(Dollars in Thousands)
    
              
Key Corp. Capital I
 $4,982  $4,208  $(774)
 BB
 Baa3
Huntington Capital Trust II SE
  4,972   4,034   (938)
 BB-
 Ba1
Bank Boston Capital Trust IV (2)
  4,964   4,061   (903)
 BB+
 Baa3
Bank America Capital III
  4,953   4,042   (911)
 BB+
 Baa3
PNC Capital Trust
  4,953   4,382   (571)
 BBB
 Baa2
Cascade Capital Trust I 144A (3)
  150   350   200    
      Total
 $24,974  $21,077  $(3,897)   
 
(1)
Trust preferred securities are single-issuance. There are no known interest deferrals, defaults or excess subordination,except for Cascade Capital Trust I 144A.
(2)
Bank Boston was acquired by Bank of America.
(3)
Security not rated and in deferral of interest.
 
The Company's management reviews the status and potential impairment of the trust preferred securities on a monthly basis.  In its review, management discusses duration of unrealized losses and reviews credit rating changes.  Other factors, but not necessarily all, considered are:  that the risk of loss is minimized and easier to determine due to the single-issuer, rather than pooled, nature of the securities, the condition of the banks listed, and whether there have been any payment deferrals or defaults to-date.  Such factors are subject to change over time.
 
Foreclosed Real Estate and Repossessed Assets.  Real estate properties and repossessed assets are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure, establishing a new cost basis.
 
Loans.  The Company does not record loans at fair value on a recurring basis.  However, if a loan is considered impaired, an allowance for loan losses is established.  Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, Accounting for Creditors for Impairment of a Loan.
 
The following table summarizes the assets of the Company for which fair values are determined on a non-recurring basis at June 30, 2011 and September 30, 2010.
 

   
Fair Value at June 30, 2011
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
              
Foreclosed Assets, net
 $2,460  $-  $2,460  $- 
Loans
  19,691   -   -   19,691 
Total
 $22,151  $-  $2,460  $19,691 
                  
  
Fair Value at September 30, 2010
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
                  
Foreclosed Assets, net
 $1,295  $-  $1,295  $- 
Loans
  13,919   -   -   13,919 
Total
 $15,214  $-  $1,295  $13,919 
 
The following table discloses the Company's estimated fair value amounts of its financial instruments.  It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company at June 30, 2011 and September 30, 2010, as more fully described below.  The operations of the Company are man­aged from a going concern basis and not a liquidation basis.  As a result, the ultimate value realized for the finan­cial instruments presented could be substantially different when actually recognized over time through the normal course of operations.  Additionally, a substantial portion of the Company's inherent value is the Bank's capitalization and franchise value.  Neither of these components have been given consideration in the presentation of fair values below.
 
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at June 30, 2011 and September 30, 2010.  The information presented is subject to change over time based on a variety of factors.

   
June 30, 2011
  
September 30, 2010
 
   
Carrying
  
Estimated
  
Carrying
  
Estimated
 
   
Amount
  
Fair Value
  
Amount
  
Fair  Value
 
   
(Dollars in Thousands)
 
              
Financial assets
            
Cash and cash equivalents
 $65,210  $65,210  $87,503  $87,503 
Securities available for sale
  629,108   629,108   506,852   506,852 
Loans receivable, net
  312,328   313,998   366,045   369,301 
FHLB stock
  5,404   5,404   5,283   5,283 
Accrued interest receivable
  4,230   4,230   4,759   4,759 
                  
Financial liabilities
                
Noninterest bearing demand deposits
  730,896   730,896   675,163   675,163 
Interest bearing demand deposits, savings, and money markets
  80,439   80,439   76,219   76,219 
Certificates of deposit
  117,254   119,174   146,072   148,490 
Total deposits
  928,589   930,509   897,454   899,872 
                  
Advances from FHLB
  21,000   23,814   22,000   25,563 
Securities sold under agreements to repurchase
  9,682   9,682   8,904   8,904 
Subordinated debentures
  10,310   10,289   10,310   10,294 
Accrued interest payable
  247   247   392   392 
                  
Off-balance-sheet instruments, loan commitments
  -   -   -   - 
 
The following sets forth the methods and assumptions used in determining the fair value estimates for the Company's financial instruments at June 30, 2011 and September 30, 2010.

CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.

SECURITIES AVAILABLE FOR SALE
To the extent available, quoted market prices or dealer quotes were used to determine the fair value of securities available for sale.  For those securities which are thinly traded, or for which market data was not available, management estimated fair value using other available data.  The amount of securities for which quoted market prices were not available is not material to the portfolio as a whole.

LOANS RECEIVABLE, NET
The fair value of loans is estimated using a historical or replacement cost basis concept (i.e. an entrance price concept).  The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities.  When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers at June 30, 2011 and September 30, 2010.  In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit quality.
 
FEDERAL HOME LOAN BANK (THE “FHLB”) STOCK
The fair value of such stock is assumed to approximate book value since the Company is generally able to redeem this stock at par value.

ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to approximate the fair value.

DEPOSITS
The carrying values of non-interest bearing checking deposits, interest bearing checking deposits, savings, and money markets is assumed to approximate fair value, since such deposits are immediately withdrawable without penalty.  The fair value of time certificates of deposit was estimated by discounting expected future cash flows by the current rates offered on certificates of deposit with similar remaining maturities.

In accordance with ASC 825, Financial Instruments, no value has been assigned to the Company's long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under ASC 825.

ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates at June 30, 2011 and September 30, 2010 for advances with similar terms and remaining maturities.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED
 
DEBENTURES
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market at June 30, 2011 and September 30, 2010 over the contractual maturity of such borrowings.

ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.

LOAN COMMITMENTS
The commitments to originate and purchase loans have terms that are consistent with current market terms.  Accordingly, the Company estimates that the fair values of these commitments are not significant.

LIMITATIONS
It must be noted that fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.  Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time.  Furthermore, since no market exists for certain of the Company's financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision.  Changes in assumptions as well as tax considerations could significantly affect the estimates.  Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.
GOODWILL AND INTANGIBLE ASSETS
GOODWILL AND INTANGIBLE ASSETS
NOTE 11. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of the Company's goodwill and intangible assets for the nine months ended June 30, 2011 and 2010 are as follows:
 
   
Traditional
  
Meta
 Payment
  
Meta
Payment
    
   
Banking
  
Systems®
  
Systems®
    
   
Goodwill
  
Patents
  
Other
  
Total
 
   
(Dollars in Thousands)
 
              
Balance as of September 30, 2010
 $1,508  $1,078  $77  $2,663 
                  
Acquisitions during the period
  -   330   -   330 
                  
Amortizations during the period
  -   -   (77)  (77)
                  
Write-offs during the period
  (1,508)  -   -   (1,508)
                  
Balance as of June 30, 2011
 $-  $1,408  $-  $1,408 
 
   
Traditional
  
Meta
Payment
  
Meta
Payment
     
   
Banking
  
Systems®
  
Systems®
     
   
Goodwill
  
Patents
  
Other
  
Total
 
   
(Dollars in Thousands)
 
                  
Balance as of September 30, 2009
 $1,508  $707  $-  $2,215 
                  
Acquisitions during the period
  -   399   231   630 
                  
Amortizations during the period
  -   -   (96)  (96)
                  
Balance as of June 30, 2010
 $1,508  $1,106  $135  $2,749 
 
The Company had no amortizable assets at June 30, 2011 and one amortizable intangible asset recorded at June 30, 2010.

The Company tests goodwill and intangible assets for impairment at least annually or more often if conditions indicate a possible impairment.  There was an impairment to goodwill during the three months ended December 31, 2010.  The Company wrote-off $1.5 million of goodwill through the income statement during the three months ended December 31, 2010 due primarily to the decline in the stock price of the Company at that time.
 
SETTLEMENT OF OTS ENFORCEMENT MATTERS AND RELATED MATTERS
REGULATORY MATTERS AND SETTLEMENT OF OTS ENFORCEMENT ACTIONS
NOTE 12.  REGULATORY MATTERS AND SETTLEMENT OF OTS ENFORCEMENT ACTIONS
 
As previously disclosed, the OTS had issued Supervisory Directives to the Bank based on the OTS' assessment of the Bank's third-party relationship risk, enterprise risk management, and rapid growth (in the MPS division) and had also advised the Bank that the OTS had determined that  the Bank engaged in unfair or deceptive acts or practices in violation of Section 5 of the Federal Trade Commission Act and the OTS Advertising Regulation in connection with the Bank's operation of the iAdvance line of credit program.  Related to the Supervisory Directives, as was previously disclosed, the OTS advised that it was preparing a Cease and Desist Order for each of the Company and the Bank, would require the Bank to reimburse certain iAdvance customers in an amount to be determined, and was considering assessment of a civil money penalty against the Bank.

On July 15, 2011, the Company and the Bank each stipulated and consented to a Cease and Desist Order (the "Orders") issued by the OTS.  Under the Orders, the OTS and the Bank agreed upon a Remuneration Plan to provide reimbursement to iAdvance Line of Credit borrowers affected by the Bank's failure to implement a recurring use plan. The Remuneration Plan provides for an aggregate amount of $4.8 million to be paid iAdvance customers. The Bank also stipulated and consented to an Order of Assessment of a Civil Money Penalty (the "Assessment") providing for the Bank's payment of $400,000. The Orders and the Assessment became effective on July 15, 2011. Under the terms of the Orders and the Assessment, the OTS acknowledges that the Company and the Bank neither admit nor deny the OTS findings in the Orders and the Assessment or that grounds exist to initiate a proceeding.

As the Company had expected, the Orders require the Company and the Bank to submit to the OTS (or its successor) various management and compliance plans and programs to address the matters initially identified in the Supervisory Directives as well as plans for enhancing Company and Bank capital and require OTS non-objection for Company cash dividends, distributions, share repurchases, payments of interest or principal on debt and incurrence of debt.  By separate letter agreement, the OTS took no objection to the Company's request to prepay its scheduled July 2011 trust preferred security payment.  Both the Company and the Bank remain well-capitalized under federal banking guidelines after the reimbursement and the Assessment.  Under the terms of the Order, the Bank agrees that it will cease and desist from (1) violations of certain laws and regulations and (2) unsafe or unsound practices that resulted in it operating without adequate: (a) internal controls, management information systems and internal audit reviews of its third party sponsorship arrangements; and (b) certain information technology policies and procedures. The limitations related to MPS following the issuance of the Supervisory Directives remain in place. Such limitations include receiving the prior written approval of the Regional Director before the Bank may (1) enter into any new third party relationship agreement concerning any credit product, deposit product (including prepaid cards), or automatic teller machine or materially amend any such existing agreement (except for amendments to achieve compliance with applicable laws,  regulations, or regulatory guidance); (2) originate, directly or through any third party, tax refund anticipation loans; (3) offer a tax refund transfer processing service directly or through any third party; or (4) offer or originate iAdvance lines of credit to new customers or permit draws on existing iAdvance lines of credit, either directly or through any third party.

Since the issuance of the Supervisory Directives, the Company and the Bank have been cooperating with the OTS to correct those aspects of our operations that were addressed in the Orders, and believe we have already made substantial progress. The Company and the Bank have completed many of the items in the Orders and expect to complete all of the required actions in the Orders by their respective deadline dates.

On July 21, 2011, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Dodd-Frank Act”), the OTS was integrated into the Office of the Comptroller of the Currency (“OCC”) and the functions of the OTS related to thrift holding companies were transferred to the Federal Reserve Board. The OCC is now responsible for the ongoing examination, supervision and regulation of the Bank.  The Dodd-Frank Act maintains the existence of the federal savings association charter and the Home Owners' Loan Act, the primary statute governing the federal savings banks.  The Federal Reserve Board is now responsible for the ongoing examination, supervision and regulation of the Company.