META FINANCIAL GROUP INC, 10-K filed on 12/20/2011
Annual Report
Document And Entity Information (USD $)
In Millions, except Share data
12 Months Ended
Sep. 30, 2011
Dec. 16, 2011
Mar. 31, 2011
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
 
 
$ 39.2 
Entity Common Stock, Shares Outstanding
 
3,190,765 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Document Type
10-K 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
Sep. 30, 2011 
 
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (USD $)
In Thousands
Sep. 30, 2011
Sep. 30, 2010
ASSETS
 
 
Cash and cash equivalents
$ 276,893 
$ 87,503 
Investment securities available for sale
28,330 
21,467 
Mortgage-backed securities available for sale
590,918 
485,385 
Loans receivable - net of allowance for loan losses of $4,926 at September 30, 2011 and $5,234 at September 30, 2010
314,410 
366,045 
Federal Home Loan Bank stock, at cost
4,737 
5,283 
Accrued interest receivable
4,133 
4,759 
Insurance receivable
2,264 
3,683 
Premises, furniture, and equipment, net
17,168 
19,377 
Bank-owned life insurance
14,322 
13,796 
Foreclosed real estate and repossessed assets
2,671 
1,295 
Goodwill and intangible assets
1,315 
2,663 
MPS accounts receivable
7,677 
8,085 
Other assets
10,643 
10,425 
Total assets
1,275,481 
1,029,766 
LIABILITIES
 
 
Non-interest-bearing checking
945,956 
675,163 
Interest-bearing checking
31,249 
29,976 
Savings deposits
11,136 
10,821 
Money market deposits
36,717 
35,422 
Time certificates of deposit
116,562 
146,072 
Total deposits
1,141,620 
897,454 
Advances from Federal Home Loan Bank
11,000 
22,000 
Securities sold under agreements to repurchase
8,055 
8,904 
Subordinated debentures
10,310 
10,310 
Accrued interest payable
223 
392 
Contingent liability
3,649 
3,983 
Accrued expenses and other liabilities
20,047 
14,679 
Total liabilities
1,194,904 
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, 3,146,867 and 3,111,413 shares outstanding at September 30, 2011 and September 30, 2010, respectively
34 
34 
Additional paid-in capital
32,471 
32,381 
Retained earnings - substantially restricted
45,494 
42,475 
Accumulated other comprehensive income (loss)
6,336 
1,599 
Treasury stock, 226,132 and 261,586 common shares, at cost, at September 30, 2011 and September 30, 2010, respectively
(3,758)
(4,445)
Total shareholders' equity
80,577 
72,044 
Total liabilities and shareholders' equity
$ 1,275,481 
$ 1,029,766 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Parenthetical) (USD $)
In Thousands, except Share data
Sep. 30, 2011
Sep. 30, 2010
ASSETS
 
 
Loans receivable, allowance for loan losses
$ 4,926 
$ 5,234 
SHAREHOLDERS' EQUITY
 
 
Preferred stock, shares authorized (in shares)
800,000 
800,000 
Preferred stock, shares issued (in shares)
0 
0 
Preferred stock, shares outstanding (in shares)
0 
0 
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized (in shares)
5,200,000 
5,200,000 
Common stock, shares issued (in shares)
3,372,999 
3,372,999 
Common stock, shares outstanding (in shares)
3,146,867 
3,111,413 
Treasury stock (in shares)
226,132 
261,586 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data
12 Months Ended
Sep. 30,
2011
2010
2009
Interest and dividend income:
 
 
 
Loans receivable, including fees
$ 19,654 
$ 24,944 
$ 25,561 
Mortgage-backed securities
18,362 
13,370 
10,230 
Other investments
1,043 
769 
935 
Total interest and dividend income
39,059 
39,083 
36,726 
Interest expense:
 
 
 
Deposits
3,069 
3,908 
5,341 
FHLB advances and other borrowings
1,678 
2,085 
3,566 
Total interest expense
4,747 
5,993 
8,907 
Net interest income
34,312 
33,090 
27,819 
Provision for loan losses
278 
15,791 
18,713 
Net interest income after provision for loan losses
34,034 
17,299 
9,106 
Non-interest income:
 
 
 
Card fees
53,890 
93,206 
77,502 
Gain on sale of securities available for sale, net
1,793 
2,140 
761 
Deposit fees
649 
766 
749 
Bank-owned life insurance income
526 
526 
512 
Loan fees
417 
359 
660 
Gain on sale of membership equity interests, net
0 
0 
515 
Gain (loss) on sale of REO
53 
(105)
(1,015)
Other income
163 
552 
285 
Total non-interest income
57,491 
97,444 
79,969 
Non-interest expense:
 
 
 
Compensation and benefits
30,467 
32,529 
32,743 
Card processing expense
23,286 
38,242 
33,540 
Occupancy and equipment expense
8,467 
8,162 
7,978 
Legal and consulting expense
5,156 
3,464 
3,745 
Goodwill impairment
1,508 
0 
0 
Marketing
1,260 
2,109 
1,822 
Data processing expense
1,092 
1,273 
2,181 
Other expense
12,026 
9,151 
9,072 
Total non-interest expense
83,262 
94,930 
91,081 
Income (loss) before income tax expense (benefit)
8,263 
19,813 
(2,006)
Income tax expense (benefit)
3,623 
7,420 
(543)
Net income (loss)
$ 4,640 
$ 12,393 
$ (1,463)
Earnings (loss) per common share:
 
 
 
Basic (in dollars per share)
$ 1.49 
$ 4.23 
$ (0.56)
Diluted (in dollars per share)
$ 1.49 
$ 4.11 
$ (0.56)
Consolidated Statements of Comprehensive Income (USD $)
In Thousands
12 Months Ended
Sep. 30,
2011
2010
2009
Consolidated Statements of Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ 4,640 
$ 12,393 
$ (1,463)
Other comprehensive income:
 
 
 
Change in net unrealized gains on securities available for sale
9,464 
7,661 
5,839 
(Gains) realized in net income
(1,793)
(2,140)
(761)
Total available for sale adjustment
7,671 
5,521 
5,078 
Deferred income tax effect
2,934 
2,084 
1,894 
Total other comprehensive income
4,737 
3,437 
3,184 
Total comprehensive income
$ 9,377 
$ 15,830 
$ 1,721 
Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss), Net of Tax [Member]
Unearned Employee Stock Ownership Plan Shares [Member]
Treasury Stock [Member]
Total
Balance at Sep. 30, 2008
$ 30 
$ 23,058 
$ 34,442 
$ (5,022)
$ 0 
$ (6,775)
$ 45,733 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Cash dividends declared on common stock
0 
0 
(1,353)
0 
0 
0 
(1,353)
Issuance of common shares from treasury stock due to exercise of stock options
0 
(153)
0 
0 
0 
168 
15 
Stock compensation
0 
641 
0 
0 
0 
148 
789 
Common shares committed to be released under the ESOP
0 
5 
0 
0 
0 
435 
440 
Change in net unrealized losses on securities available for sale, net
0 
0 
0 
3,184 
0 
0 
3,184 
Net income (loss)
0 
0 
(1,463)
0 
0 
0 
(1,463)
Balance at Sep. 30, 2009
30 
23,551 
31,626 
(1,838)
0 
(6,024)
47,345 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Cash dividends declared on common stock
0 
0 
(1,544)
0 
0 
0 
(1,544)
Issuance of common shares from the sales of equity securities
4 
8,563 
0 
0 
0 
0 
8,567 
Issuance of common shares from treasury stock due to exercise of stock options
0 
(249)
0 
0 
0 
1,579 
1,330 
Stock compensation
0 
516 
0 
0 
0 
0 
516 
Change in net unrealized losses on securities available for sale, net
0 
0 
0 
3,437 
0 
0 
3,437 
Net income (loss)
0 
0 
12,393 
0 
0 
0 
12,393 
Balance at Sep. 30, 2010
34 
32,381 
42,475 
1,599 
0 
(4,445)
72,044 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Cash dividends declared on common stock
0 
0 
(1,621)
0 
0 
0 
(1,621)
Issuance of common shares from the sales of equity securities
0 
0 
0 
0 
0 
0 
0 
Issuance of common shares from treasury stock due to exercise of stock options
0 
(112)
0 
0 
0 
687 
575 
Stock compensation
0 
202 
0 
0 
0 
0 
202 
Change in net unrealized losses on securities available for sale, net
0 
0 
0 
4,737 
0 
0 
4,737 
Net income (loss)
0 
0 
4,640 
0 
0 
0 
4,640 
Balance at Sep. 30, 2011
$ 34 
$ 32,471 
$ 45,494 
$ 6,336 
$ 0 
$ (3,758)
$ 80,577 
Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)
12 Months Ended
Sep. 30,
2011
2010
2009
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
Cash dividends declared on common stock (in dollars per share)
$ 0.52 
$ 0.52 
$ 0.52 
Issuance of common shares from treasury stock due to exercise of stock options (in shares)
13,776 
41,544 
21,624 
Common shares committed to be released under the ESOP (in shares)
 
 
18,446 
Consolidated Statements of Cash Flows (USD $)
In Thousands
12 Months Ended
Sep. 30,
2011
2010
2009
Cash flows from operating activities:
 
 
 
Net income (loss)
$ 4,640 
$ 12,393 
$ (1,463)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Effect of contribution to employee stock ownership plan
0 
0 
440 
Depreciation, amortization and accretion, net
9,758 
11,434 
5,970 
Disbursement of non-real estate consumer loans originated
(848,671)
(440,175)
(126,857)
Proceeds from sale of non-real estate consumer loans
848,553 
438,339 
126,963 
Disbursement of 1-4 family residential mortgage loans originated
(2,370)
(3,393)
(3,428)
Proceeds from sale of 1-4 family residential mortgage loans
3,627 
2,466 
3,225 
Gain on sale of loans
(188)
(830)
(67)
Provision for loan losses
278 
15,791 
18,713 
Gain on sale of investments available for sale, net
(1,793)
(2,140)
(761)
Gain on sale of membership equity interests, net
0 
0 
(515)
Loss on sale of other assets
102 
123 
1,015 
Net change in accrued interest receivable
626 
(415)
153 
Goodwill impairment
1,508 
0 
0 
Net change in other assets
923 
(1,935)
(460)
Net change in accrued interest payable
(169)
(55)
(131)
Net change in accrued expenses and other liabilities
5,034 
2,220 
4 
Net cash provided by operating activities
21,858 
34,570 
22,801 
Cash flows from investing activities:
 
 
 
Purchase of securities available for sale
(289,777)
(437,305)
(287,113)
Net change in federal funds sold
0 
9 
5,179 
Proceeds from sales of securities available for sale
55,791 
97,610 
32,478 
Proceeds from maturities and principal repayments of securities available for sale
125,085 
197,346 
97,184 
Loans purchased
(1,039)
(8,930)
(50,358)
Net change in loans receivable
53,856 
21,097 
64,102 
Proceeds from sales of foreclosed real estate
1,047 
1,105 
958 
Net change in FHLB stock
546 
1,767 
1,042 
Proceeds from the sale of premises and equipment
98 
1,154 
2 
Purchase of premises and equipment
(1,832)
(2,347)
(3,683)
Other, net
(2,935)
(1,735)
(1,894)
Net cash used in investing activities
(63,941)
(130,229)
(142,103)
Cash flows from financing activities:
 
 
 
Net change in checking, savings, and money market deposits
273,676 
243,798 
131,271 
Net change in time deposits
(29,510)
(91)
22,672 
Net change in advances from FHLB and other borrowings
(11,000)
(77,800)
(32,225)
Net change in securities sold under agreements to repurchase
(849)
2,218 
1,338 
Cash dividends paid
(1,621)
(1,544)
(1,353)
Stock compensation
202 
516 
789 
Proceeds from exercise of stock options
575 
9,897 
15 
Net cash provided by financing activities
231,473 
176,994 
122,507 
Net change in cash and cash equivalents
189,390 
81,335 
3,205 
Cash and cash equivalents at beginning of year
87,503 
6,168 
2,963 
Cash and cash equivalents at end of year
276,893 
87,503 
6,168 
Cash paid during the period for:
 
 
 
Interest
4,916 
6,048 
9,038 
Income taxes
3,255 
3,559 
2,607 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Net loans transferred to foreclosed real estate
$ 2,370 
$ 452 
$ 4,026 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Meta Financial Group, Inc. (the “Company”), a unitary savings and loan holding company located in Storm Lake, Iowa, and its wholly owned subsidiaries which include MetaBank (the “Bank”), a federally chartered savings bank whose primary federal regulator is the Office of the Comptroller of the Currency, First Services Financial Limited and Brookings Service Corporation, which offer noninsured investment products. The Company also owns 100% of First Midwest Financial Capital Trust I (the “Trust”), which was formed in July 2001 for the purpose of issuing trust preferred securities. The Trust is not included in the consolidated financial statements of the Company. All significant intercompany balances and transactions have been eliminated.

NATURE OF BUSINESS AND INDUSTRY SEGMENT INFORMATION

The primary source of income for the Company is interest from the purchase or origination of consumer, commercial, agricultural, commercial real estate, and residential real estate loans. Additionally, a significant source of income for the Company relates to payment processing services for prepaid debit cards, ATM sponsorship, and other money transfer systems and services. The Company accepts deposits from customers in the normal course of business primarily in northwest and central Iowa and eastern South Dakota and on a national basis for the MPS division. The Company operates in the banking industry, which accounts for the majority of its revenues and assets. The Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the management approach model, the Company has determined that its business is comprised of two reporting segments.

Assets held in trust or fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain significant estimates include the allowance for loan losses, the valuation of goodwill and the fair values of securities and other financial instruments. These estimates are reviewed by management regularly; however, they are particularly susceptible to significant changes in the future.

CASH AND CASH EQUIVALENTS AND FEDERAL FUNDS SOLD

For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company's cash on hand and due from financial institutions and short-term interest-bearing deposits in other financial institutions. The Company reports cash flows net for customer loan transactions, securities purchased under agreement to resell, deposit transactions, securities sold under agreements to repurchase, and FHLB advances with terms less than 90 days. The Bank is required to maintain reserve balances in cash or on deposit with the FRB, based on a percentage of deposits. The total of those reserve balances was $1.4 million and $2.3 million at September 30, 2011 and 2010, respectively. The Company at times maintains balances in excess of insured limits at various financial institutions including the FHLB, the FRB, and other private institutions. At September 30, 2011 the Company had no interest bearing deposits held at the FHLB and $271.6 million in interest bearing deposits held at the FRB. At September 30, 2011 the Company had no federal funds sold. The Company does not believe these instruments carry a significant risk of loss, but cannot provide assurances that no losses could occur if these institutions were to become insolvent.

SECURITIES

The Company classifies all securities as available for sale. Available for sale securities are those the Company may decide to sell if needed for liquidity, asset-liability management or other reasons. Available for sale securities are reported at fair value, with net unrealized gains and losses reported as other comprehensive income or loss as a separate component of stockholders' equity, net of tax.

Gains and losses on the sale of securities are determined using the specific identification method based on amortized cost and are reflected in results of operations at the time of sale. Interest and dividend income, adjusted by amortization of purchase premium or discount over the estimated life of the security using the level yield method, is included in income as earned.

Securities Impairment

Management continually monitors the investment security portfolio for impairment on a security by security basis and has a process in place to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the Company recognizes an other-than-temporary impairment for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of it amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in net income, and the amount of the loss related to other factors is recognized in other comprehensive income, net of taxes.

The amount of the credit loss component of a debt security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset- backed or floating rate security. In fiscal 2011, there were no other-than-temporary impairments recorded. In fiscal 2010, the other-than-temporary impairments recorded against the trust preferred securities were $350,000. No other-than-temporary impairments were recorded against earnings during fiscal 2009.

LOANS HELD FOR SALE AND IMMATERIAL CORRECTION OF PRIOR PERIOD

The Company originates certain consumer and residential mortgage loans specifically for resale and such loans are held for short periods of time. Such loans are reported at the lower of cost or market value.

Cash receipts and cash payments resulting from acquisitions and sales of such loans are classified as operating cash flows in the Consolidated Statements of Cash Flows.

In 2010 and 2009 the Company reported the cash receipts and cash payments from acquisitions and sales of such loans net in the investing section of the Consolidated Statements of Cash Flows. The Company has adjusted the prior period cash flows for the immaterial error in presentation.

The correction resulted in a decrease in operating cash flows of $2.8 million in 2010 and $97,000 in 2009.

LOANS RECEIVABLE

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances reduced by the allowance for loan losses and any deferred fees or costs on originated loans.
 
MPS has strived to offer consumers innovative payment products, including credit products. Most credit products have fallen into one of two general 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 equipped to take the associated credit risk. MPS's sponsorship lending programs are governed by the Policy for Sponsorship Lending which has been approved by the Board of Directors. A Portfolio Credit Policy which has been approved by the Board of Directors governs portfolio credit initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying source of repayment. Several portfolio lending programs also have a contractual provision that has indemnified MPS and the Bank for credit losses that meet or exceed predetermined levels. Such a program carries additional risks not commonly found in sponsorship programs, specifically funding and credit risk. Therefore, MPS has strived to employ policies, procedures, and information systems that are commensurate with the added risk and exposure. Due to supervisory directives issued by our regulator, an MPS lending program - iAdvance – was eliminated effective October 13, 2010. In addition, our third party relationship programs have been limited to third party relationships in existence at the time the directives were issued, absent prior approval to engage in new relationships. For additional discussion, see “Regulation - Bank Supervision and Regulation – OTS Consent Orders and Related Matters.”
 
Interest income on loans is accrued over the term of the loans based upon the amount of principal outstanding except when serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Interest income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status.

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method.

As part of the Company's ongoing risk management practices, management attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, the Company identifies and reports that loan as a troubled debt restructuring ("TDR"). Management considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower's current and prospective ability to comply with the modified terms of the loan. Additionally, the Company structures loan modifications with the intent of strengthening repayment prospects.

The Company considers whether a borrower is experiencing financial difficulties, as well as whether a concession has been granted to a borrower determined to be troubled, when determining whether a modification meets the criteria of being a TDR under ASC 310-40, Receivables. For such purposes, evidence which may indicate that a borrower is troubled includes, among other factors, the borrower's default on debt, the borrower's declaration of bankruptcy or preparation for the declaration of bankruptcy, the borrower's forecast that entity-specific cash flows will be insufficient to service the related debt, or the borrower's inability to obtain funds from sources other than existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. If a borrower is determined to be troubled based on such factors or similar evidence, a concession will be deemed to have been granted if a modification of the terms of the debt occurred that management would not otherwise consider. Such concessions may include, among other modifications, a reduction of the stated interest for the remaining original life of the debt, an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, a reduction of accrued interest, or a reduction of the face amount or maturity amount of the debt.

A modification of loan terms that management would generally not consider to be a TDR could be a temporary extension of maturity to allow a borrower to complete an asset sale whereby the proceeds of such transaction are to be paid to satisfy the outstanding debt. Additionally, a modification that extends the term of a loan, but does not involve reduction of principal or accrued interest, in which the interest rate is adjusted to reflect current market rates for similarly situated borrowers is not considered a TDR. Nevertheless, each assessment will take into account any modified terms and will be comprehensive to ensure appropriate impairment assessment.

Loans that are reported as TDRs apply the identical criteria in the determination of whether the loan should be accruing or nonaccruing. Typically, the event of classifying the loan as a TDR due to a modification of terms is independent from the determination of accruing interest on a loan in accordance with accounting standards.

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, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status until the loan becomes current.

MORTGAGE SERVICING AND TRANSFERS OF FINANCIAL ASSETS

The Bank regularly sells residential mortgage loans to others on a non-recourse basis. Sold loans are not included in the consolidated financial statements. The Bank generally retains the right to service the sold loans for a fee. At September 30, 2011 and 2010, the Bank was servicing loans for others with aggregate unpaid principal balances of $24.8 million and $27.1 million, respectively.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management's estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.

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.

FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

Real estate properties and repossessed assets acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure, establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically performed by management and valuation allowances are increased through a charge to income for reductions in fair value or increases in estimated selling costs.

INCOME TAXES

The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In accordance with ASC 740, Accounting for Uncertainty in Income Taxes, the Company recognizes a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

PREMISES, FURNITURE, AND EQUIPMENT

Land is carried at cost. Buildings, furniture, fixtures, leasehold improvements and equipment are carried at cost, less accumulated depreciation and amortization computed principally by using the straight-line method over the estimated useful lives of the assets, which range from 10 to 40 years for buildings, and 3 to 10 years for leasehold improvements, for furniture, fixtures and equipment. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

BANK-OWNED LIFE INSURANCE

Bank-owned life insurance represents the cash surrender value of investments in life insurance contracts. Earnings on the contracts are based on the earnings on the cash surrender value, less mortality costs.

EMPLOYEE STOCK OWNERSHIP PLAN

The cost of shares issued to the ESOP, but not yet allocated to participants, are presented in the consolidated statements of financial condition as a reduction of stock­holders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. Dividends on unallocated shares are used to reduce the accrued interest and principal amount of the ESOP's loan payable to the Company.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company, in the normal course of business, makes commitments to make loans which are not reflected in the consolidated financial statements.

GOODWILL AND INTANGIBLE ASSETS

Goodwill and certain intangible assets are not amortized but are subject to an impairment test at least annually or more often if conditions indicate a possible impairment.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company enters into sales of securities under agreements to repurchase with primary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to repurchase identical securities are collateralized by assets which are held in safekeeping in the name of the Bank or by the dealers who arranged the transaction. Securities sold under agreements to repurchase are treated as financings, and the obligations to repurchase such securities are reflected as a liability. The securities underlying the agreements remain in the asset accounts of the Company.

REVENUE RECOGNITION

Interest revenue from loans and investments is recognized on the accrual basis of accounting as the interest is earned according to the terms of the particular loan or investment. Income from service and other customer charges is recognized as earned. Card fee revenue within the MPS division is recognized as services are performed and service charges are earned in accordance with the terms of the various programs.

EARNINGS PER COMMON SHARE (EPS)

Basic EPS is based on the net income divided by the weighted average number of common shares outstanding during the period. Allocated ESOP shares are considered outstanding for earnings per common share calculations, as they are committed to be released; unallocated ESOP shares are not considered outstanding. Diluted EPS shows the dilutive effect of additional potential common shares issuable under stock option plans.

COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effects, and is recognized as a separate component of stockholders' equity.

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.

RECLASSIFICATIONS

Certain reclassifications have been made to prior periods' consolidated financial statements to present them on a basis comparable within the current period's consolidated financial statements.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update No.2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" (ASC Topic 310).

This ASU required significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of restructured loans will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio's risk and performance. The Company adopted this update effective in the first quarter of fiscal 2011 and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

Accounting Standards Update No. 2011-01, "Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20" (ASC Topic 310).

This ASU modified the effective date of compliance with disclosure requirements related to trouble debt restructure reporting previously indicated in ASU 2010-20. The new effective date for disclosing the required troubled debt restructuring information is for interim and annual periods ending after June 15, 2011. The Company adopted this update effective in the fourth quarter of fiscal 2011 and the adoption did not have a material effect on the Company's consolidated financial condition, results of operations or cash flow.

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 adopted ASU 2011-02 for the interim and annual period ending September 30, 2011. The adoption did not 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. 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.

Accounting Standards Update No. 2011-08 “Intangibles - Goodwill and Other” (ASC Topic 350).

The objective of this update is to simplify how entities test goodwill for impairment. This update adds a qualitative analysis to step one of the two-step process, which enables the Company to qualitatively determine if it is more likely than not that goodwill impairment exists, and if not, skip step two in determination of the amount of goodwill impairment. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, but early adoption is permitted. The Company anticipates adopting this update in the second quarter of fiscal 2012 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flow.
EARNINGS PER COMMON SHARE (EPS)
EARNINGS PER COMMON SHARE (EPS)
NOTE 2. EARNINGS PER COMMON SHARE (EPS)

A reconciliation of the income (loss) and common stock share amounts used in the computation of basic and diluted EPS for the fiscal years ended September 30, 2011, 2010 and 2009 is presented below.

   
2011
  
2010
  
2009
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
Earnings (Loss)
         
Net income (loss)
 $4,640  $12,393  $(1,463)
              
Basic EPS
            
Weighted average common shares outstanding
  3,116,302   2,936,397   2,606,072 
Less weighted average nonvested shares
  (1,667)  (3,329)  (4,995)
Weighted average common shares outstanding
  3,114,635   2,933,068   2,601,077 
              
Earnings (Loss) Per Common Share
            
Basic
 $1.49  $4.23  $(0.56)
              
Diluted EPS
            
Weighted average common shares outstanding for basic earnings per common share
  3,114,635   2,933,068   2,601,077 
Add dilutive effect of assumed exercises of stock options, net of tax benefits
  1,239   79,733   - 
Weighted average common and dilutive potential common shares outstanding
  3,115,874   3,012,801   2,601,077 
              
Earnings (Loss) Per Common Share
            
Diluted
 $1.49  $4.11  $(0.56)

Stock options totaling 365,488, 105,288, and 490,058 were not considered in computing diluted earnings per common share for the years ended September 30, 2011, 2010, and 2009, respectively, because they were not dilutive.
SECURITIES
SECURITIES
NOTE 3. SECURITIES

Securities available for sale were as follows at September 30

      
GROSS
  
GROSS
    
   
AMORTIZED
  
UNREALIZED
  
UNREALIZED
  
FAIR
 
2011
 
COST
  
GAINS
  
(LOSSES)
  
VALUE
 
   
(Dollars in Thousands)
 
Debt securities
            
Trust preferred and corporate securities
 $30,582  $-  $(8,470) $22,112 
Obligations of states and political subdivisions
  5,937   281   -   6,218 
Mortgage-backed securities
  572,467   18,591   (140)  590,918 
Total debt securities
 $608,986  $18,872  $(8,610) $619,248 
                  
                  
       
GROSS
  
GROSS
     
   
AMORTIZED
  
UNREALIZED
  
UNREALIZED
  
FAIR
 
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 

Included in securities available for sale are trust preferred securities as follows:

At September 30, 2011
               
         
Unrealized
  
S&P
  
Moody's
 
Issuer(1)
 
Book Value
  
Fair Value
  
Gain (Loss)
  
Credit Rating
  
Credit Rating
 
   
(Dollars in Thousands)
       
                   
Key Corp. Capital I
 $4,982  $3,300  $(1,682) 
BB
  
Baa3
 
Huntington Capital Trust II SE
  4,972   3,350   (1,622) 
BB-
  
Ba1
 
Bank Boston Capital Trust IV (2)
  4,965   2,999   (1,966) 
BB+
  
Ba1
 
Bank America Capital III
  4,954   3,100   (1,854) 
BB+
  
Ba1
 
PNC Capital Trust
  4,954   3,650   (1,304) 
BBB
  
Baa2
 
Total
 $24,827  $16,399  $(8,428)        

(1) Trust preferred securities are single-issuance. There are no known deferrals, defaults or excess subordination.
(2) Bank Boston now known as Bank of America.

Management has a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluating the length of time and extent to which the fair value has been less than the amortized cost basis, reviewing available information regarding the financial position of the issuer, monitoring the rating of the security, and projecting cash flows. 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 five banks listed, and whether there have been any payment deferrals or defaults to-date. Such factors are subject to change over time.

Management also determines if it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized

For all securities that are considered temporarily impaired, the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may occur at maturity. The Company believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.

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 September 30, 2011 and 2010 are as follows:

   
LESS THAN 12 MONTHS
  
OVER 12 MONTHS
  
TOTAL
 
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
2011
 
Value
  
(Losses)
  
Value
  
(Losses)
  
Value
  
(Losses)
 
   
(Dollars in Thousands)
 
Debt securities
                  
Trust preferred and corporate securities
 $5,713  $(42) $16,399  $(8,428) $22,112  $(8,470)
Obligations of states and political subdivisions
  -   -   -   -   -   - 
Mortgage-backed securities
  23,886   (140)  -   -   23,886   (140)
Total debt securities
 $29,599  $(182) $16,399  $(8,428) $45,998  $(8,610)
                          
                          
   
LESS THAN 12 MONTHS
  
OVER 12 MONTHS
  
TOTAL
 
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
 
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)

As of September 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 September 30, 2011. As of September 30, 2010, the investment portfolio did include one security, the Cascade Capital Trust I 144A security, that had other-than-temporary-impairment. The difference between the present value of cash flows and the amortized cost basis was recorded as a credit loss impairment and recognized in earnings in the amount of $350,000.

The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.
 
   
AMORTIZED
  
FAIR
 
   
COST
  
VALUE
 
September 30, 2011
 
(Dollars in Thousands)
 
        
Due in one year or less
 $448  $458 
Due after one year through five years
  7,022   7,038 
Due after five years through ten years
  2,237   2,310 
Due after ten years
  26,812   18,524 
    36,519   28,330 
Mortgage-backed securities
  572,467   590,918 
Total debt securities
 $608,986  $619,248 

Activities related to the sale of securities available for sale are summarized below.

   
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
           
Proceeds from sales
 $55,791  $97,610  $32,478 
Gross gains on sales
  1,793   2,224   762 
Gross losses on sales
  -   84   1 
LOANS RECEIVABLE, NET
LOANS RECEIVABLE, NET
NOTE 4. LOANS RECEIVABLE, NET

Year end loans receivable were as follows:

September 30,
 
2011
  
2010
 
   
(Dollars in Thousands)
 
        
One to four family residential mortgage loans
 $33,753  $39,010 
One to four family residential mortgage loans held for sale
  375   1,444 
Commercial and multi-family real estate loans
  194,414   204,820 
Agricultural real estate loans
  20,320   25,895 
Consumer loans
  32,418   46,250 
Consumer loans held for sale
  1,980   1,863 
Commercial business loans
  14,955   19,709 
Agricultural business loans
  21,200   32,528 
Total Loans Receivable
  319,415   371,519 
          
Less:
        
Allowance for loan losses
  (4,926)  (5,234)
Undisbursed portion of loans in process
  -   - 
Net deferred loan origination fees
  (79)  (240)
Total Loans Receivable, Net
 $314,410  $366,045 

Annual activity in the allowance for loan losses was as follows:

Year ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
Continuing Operations:
         
Beginning balance
 $5,234  $6,993  $5,732 
Provision for loan losses
  278   15,791   18,713 
Recoveries
  521   1,855   632 
Charge offs
  (1,107)  (19,405)  (18,084)
Ending balance
 $4,926  $5,234  $6,993 

Allowance for Loan Losses and Recorded Investment in loans at September 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
 
                          
Year Ended September 30, 2011
                        
                          
Allowance for loan losses:
                        
Beginning balance
 $50  $3,053  $111  $738  $131  $125  $1,026  $5,234 
Provision charged (credited) to expense
  344   807   (111)  (367)  (52)  (58)  (285)  278 
Losses charged off
  (229)  (61)  -   (774)  (43)  -   -   (1,107)
Recoveries
  -   102   -   419   -   -   -   521 
Ending balance
 $165  $3,901  $-  $16  $36  $67  $741  $4,926 
                                  
                                  
Ending balance: individually evaluated for impairment
 $1  $1,845  $-  $-  $3  $-  $-  $1,849 
Ending balance: collectively evaluated for impairment
 $164  $2,056  $-  $16  $33  $67  $741  $3,077 
Ending balance: loans acquired with deteriorated credit quality
 $-  $-  $-  $-  $-  $-  $-  $- 
                                  
Loans:
                                
Ending balance: individually evaluated for impairment
 $127  $13,025  $-  $-  $30  $-  $-  $13,182 
Ending balance: collectively evaluated for impairment
 $33,922  $181,389  $20,320  $34,398  $14,925  $21,200  $-  $306,154 
Ending balance: loans acquired with deteriorated credit quality
 $-  $-  $-  $-  $-  $-  $-  $- 

The Asset Classification at September 30, 2011 and 2010 are as follows:
 
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  $33,947  $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  $34,398  $14,955  $21,200 
 
September 30, 2010
                  
   
1-4 Family Residential
  
Commercial and Multi Family Real Estate
  
Agricultural Real Estate
  
Consumer
  
Commercial Business
  
Agricultural Operating
 
                    
Pass
 $39,704  $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   -   - 
   $40,454  $204,820  $25,896  $48,113  $19,709  $32,528 

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, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status until the loan becomes current. Past due loans at September 30, 2011 and September 30, 2010 are as follows:

September 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
 $51  $30  $127  $208  $33,920  $34,128  $- 
Commercial Real Estate and Multi Family
  2,460   -   9,075   11,535   182,879   194,414   - 
Agricultural Real Estate
  -   -   -   -   20,320   20,320   - 
Consumer
  26   14   24   64   34,334   34,398   24 
Commercial Operating
  -   -   -   -   14,955   14,955   - 
Agricultural Operating
  -   -   -   -   21,200   21,200   - 
Total
 $2,537  $44  $9,226  $11,807  $307,608  $319,415  $24 
                              
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 Operating
  -   -   400   400   32,128   32,528   - 
Total
 $4,613  $793  $7,759  $13,165  $358,115  $371,280  $785 

Impaired loans at September 30, 2011 and September 30, 2010 are as follows:

   
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  $- 
                      
                      
   
Recorded Balance
  
Unpaid Principal Balance
  
Specific Allowance
  
Average Investment in Impaired Loans
  
Interest Income Recognized
 
September 30, 2010
                    
                      
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
 $39  $39  $2  $165  $- 
Commercial Real Estate and Multi Family
  4,137   9,684   266   8,336   - 
Agricultural Real Estate
  2,650   2,650   21   530   - 
Consumer
  -   -   -   26   - 
Commercial Operating
  241   241   121   501   - 
Agricultural Operating
  400   400   60   80   - 
Total
 $7,467  $13,014  $470  $9,638  $- 
 
Cash interest collected on impaired loans was not material during the years ended September 30, 2011 and 2010.

For fical 2011 and 2010, the Company's troubled debt restructurings (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. Troubled debt restructured loans at September 30, 2011 and September 30, 2010 are as follows:

   
September 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  $328  $328   1  $45  $45 
Commercial Real Estate and Multi Family
  8   8,390   8,424   2   377   377 
Agricultural Real Estate
  -   -   -   -   -   - 
Consumer
  1   19   19   -   -   - 
Commercial Operating
  3   67   111   -   -   - 
Agricultural Operating
  -   -   -   -   -   - 
Total
  15  $8,804  $8,881   3  $422  $422 

The following table provides information on troubled debt restructured loans for which there was a payment default during the fiscal year ended September 30, 2011 and 2010, that had been modified during the 12-month period prior to the default:

   
With Payment Deafaults During the Following Periods
 
   
September 30, 2011
  
September 30, 2010
 
   
Number of Loans
  
Recorded Investment
  
Number of Loans
  
Recorded Investment
 
Residential 1-4 Family
  1  $42   -  $- 
Commercial Real Estate and Multi Family
  -   -   -   - 
Agricultural Real Estate
  -   -   -   - 
Consumer
  -   -   -   - 
Commercial Operating
  -   -   -   - 
Agricultural Operating
  -   -   -   - 
Total
  1  $42   -  $- 

Virtually all of the Company's originated loans are to Iowa- and South Dakota-based individuals and organizations. The Company's purchased loans totaled $23.2 million at September 30, 2011, which were secured by properties located, as a percentage of total loans, as follows: 2% in Iowa and Oregon, 1% each in Washington and Minnesota and the remaining 1% in seven other states.

The Company originates and purchases commercial real estate loans. These loans are considered by management to be of somewhat greater risk of uncollectibility due to the dependency on income production. The Company's commercial real estate loans include $24.3 million of loans secured by hotel properties and $46.4 million of multi-family properties at September 30, 2011. The Company's commercial real estate loans include $25.2 million of loans secured by hotel properties and $48.2 million of multi-family properties at September 30, 2010. The remainder of the commercial real estate portfolio is diversified by industry. The Company's policy for requiring collateral and guarantees varies with the credit­worthiness of each borrower.

Non-Accruing loans were $13.2 million and $7.5 million at September 30, 2011 and 2010, respectively. There were $24,000 and $0.8 million accruing loans delinquent 90 days or more at September 30, 2011 and 2010, respectively.
LOAN SERVICING
LOAN SERVICING
NOTE 5. LOAN SERVICING

Loans serviced for others are not reported as assets. The unpaid principal balances of these loans at year end were as follows:

   
2011
  
2010
 
   
(Dollars in Thousands)
 
        
Mortgage loan portfolios serviced for FNMA
 $15,965  $15,837 
Other
  8,794   11,281 
   $24,759  $27,118 
PREMISES, FURNITURE, AND EQUIPMENT, NET
PREMISES, FURNITURE, AND EQUIPMENT, NET
NOTE 6. PREMISES, FURNITURE, AND EQUIPMENT, NET

Year end premises and equipment were as follows:

September 30,
 
2011
  
2010
 
   
(Dollars in Thousands)
 
        
Land
 $2,429  $2,429 
Buildings
  13,369   13,357 
Furniture, fixtures, and equipment
  21,673   21,266 
    37,471   37,052 
Less accumulated depreciation
  (20,303)  (17,675)
   $17,168  $19,377 

Depreciation expense of premises, furniture, and equipment included in occupancy and equipment expense was approximately $3.8 million, $3.7 million, and $3.6 million for the years ended September 30, 2011, 2010, and 2009, respectively.
TIME CERTIFICATES OF DEPOSITS
TIME CERTIFICATES OF DEPOSITS
NOTE 7. TIME CERTIFICATES OF DEPOSITS

Time certificates of deposits in denominations of $100,000 or more were approximately $38.0 million and $61.8 million at September 30, 2011, and 2010, respectively.

At September 30, 2011, the scheduled maturities of time certificates of deposits were as follows for the years ending:

September 30,
   
(Dollars in Thousands)
   
     
2012
 $62,357 
2013
  41,721 
2014
  5,607 
2015
  4,402 
2016
  2,475 
Total Certificates
 $116,562 

Under the Dodd-Frank Act, non-IRA deposit accounts are permanently insured up to $250,000 by the DIF under management of the FDIC. Previous to the legislation in 2010, the coverage of $250,000 was temporary until December 2013. IRA deposit accounts are permanently insured up to $250,000 by the DIF under management of the FDIC.
ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
NOTE 8. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

At September 30, 2011, the Company's advances from the FHLB had fixed rates ranging from 4.03% to 7.01% with a weighted average rate of 6.0%. The scheduled maturities of FHLB advances were as follows for the years ending:

September 30,
   
(Dollars in Thousands)
   
     
2012
 $- 
2013
  2,500 
2014
  - 
2015
  1,500 
2016
  - 
Thereafter
  7,000 
Total FHLB Advances
 $11,000 

The Company had no overnight federal funds purchased from the FHLB as of September 30, 2011.

As of September 30, 2010, the Company's advances from the FHLB totaled $22.0 million and carried a weighted average rate of 5.10%. The Company had no overnight federal funds purchased from the FHLB.

The Bank has executed blanket pledge agreements whereby the Bank assigns, transfers, and pledges to the FHLB and grants to the FHLB a security interest in all mortgage collateral and securities collateral. The Bank has the right to use, commingle, and dispose of the collateral it has assigned to the FHLB. Under the agreement, the Bank must maintain “eligible collateral” that has a “lending value” at least equal to the “required collateral amount,” all as defined by the agreement.

At year end 2011, and 2010, the Bank pledged securities with fair values of approximately $172.4 million and $198.3 million, respectively, against specific FHLB advances. In addition, qualifying mortgage loans of approximately $30.7 million, and $35.8 million were pledged as collateral at September 30, 2011 and 2010, respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
NOTE 9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase totaled approximately $8.1 million and $8.9 million at September 30, 2011 and 2010, respectively.

An analysis of securities sold under agreements to repurchase follows:

September 30,
 
2011
  
2010
 
   
(Dollars in Thousands)
 
        
Highest month-end balance
 $11,787  $11,880 
Average balance
  6,018   7,479 
Weighted average interest rate for the year
  0.50%  0.50%
Weighted average interest rate at yearend
  0.50%  0.50%

The Company pledged securities with fair values of approximately $15.1 million at September 30, 2011, as collateral for securities sold under agreements to repurchase. There were $19.3 million securities pledged as collateral for securities sold under agreements to repurchase at September 30, 2010.

NOTE 10. SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES

Subordinated debentures are due to First Midwest Financial Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The debentures were issued in 2001 in conjunction with the Trust's issuance of 10,000 shares of Trust Preferred Securities. The debentures bear the same interest rate and terms as the trust preferred securities. The debentures are included on the balance sheet as liabilities.

The Company issued all of the 10,000 authorized shares of trust preferred securities of First Midwest Financial Capital Trust I holding solely subordinated debt securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a variable rate of LIBOR (as defined) plus 3.75% (4.31% at September 30, 2011 and 4.21% at September 30, 2010), not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions are required to be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than July 25, 2007. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption plus, if redeemed prior to July 25, 2011, a redemption premium as defined in the Indenture agreement.

Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company's indebtedness and senior to the Company's common stock.

Although the securities issued by the trusts are not included as a component of stockholders' equity, the securities are treated as capital for regulatory purposes, subject to certain limitations.
SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
NOTE 10. SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES

Subordinated debentures are due to First Midwest Financial Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The debentures were issued in 2001 in conjunction with the Trust's issuance of 10,000 shares of Trust Preferred Securities. The debentures bear the same interest rate and terms as the trust preferred securities. The debentures are included on the balance sheet as liabilities.

The Company issued all of the 10,000 authorized shares of trust preferred securities of First Midwest Financial Capital Trust I holding solely subordinated debt securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a variable rate of LIBOR (as defined) plus 3.75% (4.31% at September 30, 2011 and 4.21% at September 30, 2010), not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions are required to be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than July 25, 2007. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption plus, if redeemed prior to July 25, 2011, a redemption premium as defined in the Indenture agreement.

Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company's indebtedness and senior to the Company's common stock.

Although the securities issued by the trusts are not included as a component of stockholders' equity, the securities are treated as capital for regulatory purposes, subject to certain limitations.
EMPLOYEE STOCK OWNERSHIP AND PROFIT SHARING PLANS
EMPLOYEE STOCK OWNERSHIP AND PROFIT SHARING PLANS
NOTE 11. EMPLOYEE STOCK OWNERSHIP AND PROFIT SHARING PLANS

The Company maintains an Employee Stock Ownership Plan (ESOP) for eligible employees who have 1,000 hours of employment with the Bank, have worked one year at the Bank and who have attained age 21. ESOP expense of $737,000, $654,000 and $388,000 was recorded for the years ended September 30, 2011, 2010 and 2009, respectively. Contributions of $772,000, $654,000 and $440,000 were made to the ESOP during the years ended September 30, 2011, 2010 and 2009, respectively.

Contributions to the ESOP and shares released from suspense are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after seven years of credited service. Prior to the completion of seven years of credited service, a participant who terminates employment for reasons other than death or disability receives a reduced benefit based on the ESOP's vesting schedule. Forfeitures are reallocated among remaining participating employees in the same proportion as contributions. Benefits are payable in the form of stock upon termination of employment. The Company's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.

For the years ended September 30, 2011, 2010 and 2009, 43,898 shares, 20,428 shares and 18,446 shares with a fair value of $17.58, $32.00 and $23.86 per share, respectively, were released. Also for the years ended September 30, 2011, 2010 and 2009, allocated shares and total ESOP shares reflect 20,938 shares, 15,966 shares, and 254 shares, respectively, withdrawn from the ESOP by participants who are no longer with the Company or by participants diversifying their holdings. At September 30, 2011, 11,567 shares were purchased for dividend reinvestment. At September 30, 2010 there were no shares purchased for dividend reinvestment. At September 30, 2009, 535 shares were purchased for dividend reinvestment.

Year-end ESOP shares are as follows:

September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
           
Allocated shares
  248,427   213,900   209,438 
Unearned shares
  -   -   - 
Total ESOP shares
  248,427   213,900   209,438 
              
Fair value of unearned shares
 $-  $-  $- 

The Company also has a profit sharing plan covering substantially all full-time employees. Contribution expense to the profit sharing plan, included in compensation and benefits, for the year ended September 30, 2011 and 2010 was $780,000 and $726,000, respectively. There was no contribution expense to the profit sharing plan for the year ended September 30, 2009.
SHARE BASED COMPENSATION PLANS
SHARE BASED COMPENSATION PLANS
NOTE 12. SHARE BASED COMPENSATION PLANS

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.

The following table shows the effect to income, net of tax benefits, of share-based expense recorded in the years ended September 30, 2011, 2010 and 2009.

Year Ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
Total employee stock-based compensation expense recognized in income, net of tax effects of $45, $89 and $75, respectively
 $244  $450  $714 

As of September 30, 2011, stock-based compensation expense not yet recognized in income totaled $103,000 which is expected to be recognized over a weighted average remaining period of 0.53 years.

At grant date, the fair value of options awarded to recipients is estimated using a Black-Scholes valuation model. The exercise price of stock options equals the fair market value of the underlying stock at the date of grant. The following table shows the key valuation assumptions used for options granted during the years ended September 30, 2011, 2010, and 2009, and other information. Options are issued for 10 year periods with 100% vesting generally occurring either at grant date or over a four year period.
 
Year Ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
           
Risk-free interest rate
  0.95% - 0.96%  1.27% - 2.36%  1.50% - 2.82%
              
Expected annual standard deviation
            
Range
  55.31% - 55.50%  44.89% - 45.89%  46.48% - 68.70%
Weighted average
  55.32%  45.06%  51.04%
Expected life (years)
  5   5   6 
              
Expected dividend yield
            
Range
  2.83% - 2.96%  1.64% - 3.02%  2.26% - 6.30%
Weighted average
  2.95%  1.69%  3.05%
Weighted average fair value of options granted during period
 $6.62  $10.83  $7.44 
Intrinsic value of options exercised during period
 $64  $426  $181 

The Company awarded nonvested shares during the fiscal years ended 2011, 2010 and 2009. Shares vest immediately up to a period of four years. The following table shows the weighted average fair value of nonvested (restricted) shares awarded and the total fair value of nonvested (restricted) shares which vested during the fiscal years ended 2011, 2010 and 2009. The fair value is determined based on the fair market value of the Company's stock on the grant date.

Year Ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
Weighted average fair value of nonvested shares granted during period
 $17.90  $23.01  $16.00 
Total fair value of nonvested shares vested during period
 $147  $124  $124 

In addition to the Company's 2002 Omnibus Incentive Plan, the Company also maintains the 1995 Stock Option and Incentive Plan. No new options were, or could have been, awarded under the 1995 plan during the year ended September 30, 2011; however, previously awarded but unexercised options were outstanding under this plan during the year.

The following tables show the activity of options and nonvested (restricted) shares granted, exercised, or forfeited under all of the Company's option and incentive plans during the years ended September 30, 2011 and 2010.

         
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
  24,935   17.61         
Exercised
  (13,776)  13.65         
Forfeited or expired
  (16,800)  25.94         
Options outstanding, September 30, 2011
  485,352  $23.28   5.90  $463 
                  
Options exercisable end of year
  452,977  $23.31   5.91  $401 
                  
                  
           
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, 2009
  577,921  $23.74   7.12  $1,836 
Granted
  55,153   30.96         
Exercised
  (41,544)  16.29         
Forfeited or expired
  (100,537)  32.30         
Options outstanding, September 30, 2010
  490,993  $23.39   6.49  $4,579 
                  
Options exercisable end of year
  448,793  $23.38   6.45  $4,204 

   
Number of
  
Weighted Average
 
   
Shares
  
Fair Value At Grant
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
        
Nonvested shares outstanding, September 30, 2010
  1,667  $24.43 
Granted
  5,950   17.90 
Vested
  (7,617)  19.33 
Forfeited or expired
  -   - 
Nonvested shares outstanding, September 30, 2011
  -  $- 
          
          
   
Number of
  
Weighted Average
 
   
Shares
  
Fair Value At Grant
 
   
(Dollars in Thousands, Except Share and Per Share Data)
 
          
Nonvested shares outstanding, September 30, 2009
  3,334  $24.43 
Granted
  3,600   23.01 
Vested
  (5,267)  23.46 
Forfeited or expired
  -   - 
Nonvested shares outstanding, September 30, 2010
  1,667  $24.43 
INCOME TAXES
INCOME TAXES
NOTE 13. INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis.

The provision for income taxes consists of:

Years ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
Federal:
         
Current
 $4,101  $5,194  $299 
Deferred
  (783)  1,175   (840)
    3,318   6,369   (541)
              
State:
            
Current
  460   928   128 
Deferred
  (155)  123   (130)
    305   1,051   (2)
              
Income tax expense (benefit)
 $3,623  $7,420  $(543)

Total income tax expense (benefit) differs from the statutory federal income tax rate as follows:

Years ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
           
Income tax expense (benefit) at 35% federal tax rate
 $2,892  $6,935  $(682)
Increase (decrease) resulting from:
            
State income taxes net of federal benefit
  198   683   (1)
Nontaxable buildup in cash surrender value
  (184)  (184)  (174)
Incentive stock option expense
  52   46   200 
Tax exempt income
  (38)  (25)  (19)
Nondeductible expenses
  728   78   101 
Other, net
  (25)  (113)  32 
Total income tax expense (benefit)
 $3,623  $7,420  $(543)

Year-end deferred tax assets and liabilities included in other assets and other liabilities consist of:

September 30,
 
2011
  
2010
 
   
(Dollars in Thousands)
 
Deferred tax assets:
      
 Bad debts
 $1,884  $2,002 
 Stock based compensation
  358   384 
 Operational reserve
  676   517 
 Other, net
  2,084   1,164 
Gross deferred tax assets
  5,002   4,067 
          
Deferred tax liabilities:
        
 FHLB stock dividend
  (433)  (433)
 Premises and equipment
  (1,232)  (1,455)
 Patents
  (503)  (412)
 Prepaid expenses
  (658)  (529)
 Net unrealized gains on securities available for sale
  (3,925)  (985)
 Deferred loan fees
  (63)  (63)
Gross deferred tax liabilities
  (6,814)  (3,877)
          
Net deferred tax assets (liabilities)
 $(1,812) $190 
 
Federal income tax laws provided savings banks with additional bad debt deductions through September 30, 1987 totaling $6.7 million for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total approximately $2.3 million at September 30, 2011, and 2010. If the Bank were to be liquidated or otherwise cease to be a bank, or if tax laws were to change, the $2.3 million would be recorded as expense.

The provisions of ASC 740, Accounting for Uncertainty in Income Taxes address the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740, the Company recognizes the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination, with a tax examination being presumed to occur, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Management believes that the realization of deferred tax assets is more likely than not based on the expectations as to future taxable income; therefore, there was no deferred tax valuation allowance at September 30, 2011 and 2010.

In addition, the Company is required to establish contingency reserves for material, known tax exposures. The Company's tax reserves reflect management's judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company's income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances surrounding a tax issue, and (ii) any difference from the Company's tax position as recorded in the financial statements and the final resolution of a tax issue during the period

Income tax returns for fiscal years 2009 thru 2011, with few exceptions, remain open to examination by federal and state taxing authorities. The Company determined that no liability for unrecognized tax benefits and associated accrued interest and penalties existed at September 30, 2011 and 2010.
CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
NOTE 14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

The Bank is the Company's primary subsidiary. The Bank is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific quantitative capital guidelines using its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The requirements are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) to average assets (as defined). As of September 30, 2011, the Bank met all capital adequacy requirements.

The Bank's actual and required capital amounts and ratios are presented in the following table.
 
   
Actual
  
Minimum Requirement For
Capital Adequacy Purposes
  
Minimum Requirement To Be
Well Capitalized Under Prompt
Corrective Action Provisions
 
   
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
 
(Dollars in Thousands)
                  
                    
September 30, 2011
                  
                    
MetaBank
                  
Tangible capital (to tangible assets)
 $80,824   6.38 % $19,012   1.50 %  n/a   n/a 
Tier 1 (core) capital (to adjusted total assets)
  80,824   6.38   50,698   4.00  $63,372   5.00 %
Tier 1 (core) capital (to risk-weighted assets)
  80,824   18.97   17,046   4.00   25,568   6.00 
Total risk based capital (to risk weighted assets)
  85,750   20.12   34,091   8.00   42,614   10.00 
                          
                          
September 30, 2010
                        
                          
MetaBank
                        
Tangible capital (to tangible assets)
 $74,642   7.29 % $15,368   1.50 %  n/a   n/a 
Tier 1 (core) capital (to adjusted total assets)
  74,642   7.29   40,981   4.00  $51,226   5.00 %
Tier 1 (core) capital (to risk-weighted assets)
  74,642   17.57   16,991   4.00   25,487   6.00 
Total risk based capital (to risk weighted assets)
  79,876   18.80   33,983   8.00   42,478   10.00 

Regulations limit the amount of dividends and other capital distributions that may be paid by a financial institution without prior approval of its primary regulator. The regulatory restriction is based on a three-tiered system with the greatest flexibility being afforded to well-capitalized (Tier 1) institutions. The Bank is currently a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory approval, distributions during a calendar year up to 100% of their retained net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid) as long as they remain well-capitalized, as defined in prompt corrective action regulations, following the proposed distribution. Accordingly, at September 30, 2011, approximately $17.1 million of the Bank's retained earnings were potentially available for distribution to the Company.

During 2010, the Office of Thrift Supervision ("OTS") 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. On July 15, 2011, the Company and the Bank each stipulated and consented to a Cease and Desist Order (together, the "Orders" or the “Consent 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. Both sums were paid in the fourth quarter of fiscal 2011. Under the terms of the Orders and the Assessment, the OTS acknowledged that the Company and the Bank neither admitted nor denied the OTS findings in the Orders and the Assessment or that grounds existed to initiate a proceeding.

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 non-objection by OTS (or its successor) for Company cash dividends, distributions, share repurchases, payments of interest or principal on debt and incurrence of debt. 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 of the OTS (or its successor) 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.

Compliance with the Orders will be subject to the review and supervision of the OCC with respect the Bank and the Federal Reserve Board with respect to the Company. There can be no assurance that the Company or the Bank can fully comply with the requirements of the Orders or receive non-objection to the Company's payment of dividends and interest.

The Orders further 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. Although there can be no assurance that such actions will continue in the future, by separate letter agreement, the OTS took no objection to the Company's request to prepay its scheduled July 2011 trust preferred security payment; similarly, the Federal Reserve has approved the Company's declaration of a dividend payable on January 1, 2012 to stockholders of record on December 12, 2011. Both the Company and the Bank remain well-capitalized under federal banking guidelines after the reimbursement and the Assessment.

Since the issuance of the Supervisory Directives and the Consent Orders, the Company and the Bank have been cooperating with the OTS and the OCC to correct those aspects of its operations that were addressed in the Orders, and management of the Company and the Bank believe they 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 Act, the OTS was integrated into the 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 HOLA, 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.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
NOTE 15. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes various commitments to extend credit which are not reflected in the accompanying consolidated financial statements.

At September 30, 2011 and 2010, unfunded loan commitments approximated $48.0 million and $37.8 million respectively, excluding undisbursed portions of loans in process. Unfunded loan commitments at September 30, 2011 and 2010 were principally for variable rate loans. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract.

The exposure to credit loss in the event of nonperformance by other parties to financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance-sheet instruments.

Since certain commitments to make loans and to fund lines of credit and loans in process expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Securities with fair values of approximately $18.0 million and $9.9 million at September 30, 2011 and 2010, respectively, were pledged as collateral for public funds on deposit. Securities with fair values of approximately $13.9 million and $16.6 million at September 30, 2011 and 2010, respectively, were pledged as collateral for individual, trust and estate deposits.

Under employment agreements with certain executive officers, certain events leading to separation from the Company could result in cash payments totaling approximately $4.6 million as of September 30, 2011. Currently, however, pursuant to the Consent Orders, and subject to certain exceptions, no payments that are contingent on the termination of employment of such officers may be made.

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 five have been settled for payments that the Company deemed reasonable under the circumstances, including the costs of litigation. Most recently, the class action, Guardian Angel Credit Union v. MetaBank et al., Case No. 08-cv-261-PB (USDC, District of NH), was settled.

There is now one remaining lawsuit relating to this matter: Airline Pilots Assoc Federal Credit Union v. MetaBank, filed 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, plaintiff in the remaining case seeks to impose liability on the Bank under a number of legal theories with respect to the $99,000 fraudulent CD that was 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.
 
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. In the fourth quarter of fiscal 2011, this matter was settled for a payment deemed reasonable under the circumstances, including costs of litigation.

In re Meta Financial Group, Inc., Securities Litigation; Case No. C10-4108MWB. Two former stockholders filed separate purported class action lawsuits against the Company and certain of its officers alleging violations of certain federal securities laws. The cases were filed on October 22, 2010 and November 5, 2010 in the United States District Court for the Northern District of Iowa purportedly on behalf of those who purchased the Company's stock between May 14, 2009 and October 15, 2010. On January 12, 2011, Judge Mark W. Bennett appointed The Eden Partnership lead plaintiff and on March 14, 2011 Eden Partnership filed its amended complaint. The amended complaint alleges that 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 made between May 14, 2009 and October 15, 2010 by the Company and its officers. Defendants moved to dismiss the amended complaint in its entirety but on July 18, 2011, the court denied the motion and ordered that discovery proceed. The parties conducted a mediation on December 5, 2011 and reached a tentative settlement of the matter. After the terms of the settlement are reduced to a definitive settlement agreement, the settlement must then be reviewed by the court, submitted to the class members for their consideration and comment, and finally approved by the court before the matter can be dismissed with prejudice. As of the filing of this Annual Report on Form 10-K, provided that the amount of the tentative settlement is approved by the court and the amount of the settlement is paid by the Company's insurance as expected by the Company, the Company does not expect to incur losses in addition to the amounts that it has previously expensed which would be material to its consolidated financial statements.
 
On December 9, 2011, a stockholder derivative complaint captioned Brown v. Haahr, et al., CL 123931, was filed in the Iowa District Court for Polk County against certain officers and directors of the Company. The suit alleges that named parties breached their fiduciary duties to the Company by, among other things, making statements between May, 2009 and October, 2010, which plaintiff claims were false and misleading and by allegedly failing to implement adequate internal controls and means of supervision at the Company. The individual defendants intend to vigorously defend the suit. An estimate of a range of possible loss cannot be made as of the filing of this Annual Report on Form 10-K because of the early stage of the litigation.

In addition to the previously disclosed ATM lawsuits filed in 2011, there were two lawsuits filed in the fourth quarter of fiscal 2011, and four additional lawsuits since, concerning ATMs 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: Wallace Stilz, III. v. Meta Financial Group, Inc., Case No. 1:11-cv-04531, filed in the United States District Court for the Northern District of Illinois, Eastern Division; and Spencer Webb, Individually and on Behalf of all Others Similarly Situated v. MetaBank, Meta Payment Systems, and Does 1-10, Inclusive, Case No. 3:11-cv-02178-H-NLS, filed in the United States District Court for the Southern District of California; Tamara Vance, on behalf of herself and a class v. MetaBank, N.A. and Does 1-5, Case No. 1:11-cv-06972, filed in the United States District Court for the Northern District of Illinois, Eastern Division; Ian Collins, Individually and on Behalf of All Others Similarly Situated v. Mission Gorge Liquor, MetaBank, Meta Payment Systems, and Does 1-10, Inclusive, Case No. 3:11-cv-02345-L-POR, filed in the United States District Court for the Southern District of California; Spencer Webb, Individually and on Behalf of all Others Similarly Situated v. MetaBank, Meta Payment Systems, Swipe USA, LLC, and Does 1-10, Inclusive, Case No. 3:11-cv-02240-MMA-BLM, filed in the United States District Court for the Southern District of California; and Matthew Johns v. MAF Systems ATM, MetaBank, ATM Express Inc., Does 1-10 and XYZ Corporation, Case No. 2011-25436, filed in the Court of Common Pleas, Montgomery County, Pennsylvania. 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. An estimate of a range of possible loss cannot be made 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 et al, 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. An estimate of a range of possible loss is approximately $0 to $0.5 million as of the filing date of this Annual Report on Form 10-K.

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 the State of Florida for garnishment proceedings against the processor and its insurer. The Company's estimate of a range of possible loss is approximately $0 to $0.5 million as of the filing date of this Annual Report on Form 10-K.

Certain corporate clients of an unrelated company named Springbok Services, Inc. (“Springbok”) 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 possible loss is approximately $0 to $0.3 million.

For further discussion, see Note 14 herein.
LEASE COMMITMENTS
LEASE COMMITMENTS
NOTE 16. LEASE COMMITMENTS

The Company has leased property under various noncancelable operating lease agreements which expire at various times through 2036, and require annual rentals ranging from $3,400 to $988,000 plus the payment of the property taxes, normal maintenance, and insurance on certain property.

The following table shows the total minimum rental commitment at September 30, 2011, under the leases.

September 30,
   
(Dollars in Thousands)
   
     
2012
 $1,548 
2013
  1,353 
2014
  1,186 
2015
  1,126 
2016
  1,150 
Thereafter
  3,093 
Total Leases Commitments
 $9,456 
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 17. SEGMENT REPORTING

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, Retail Banking, consists of its banking subsidiary, the Bank. 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. The second reportable segment, MPS, is a division of the Bank. MPS provides a number of products and services to financial institutions and other businesses. These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, credit programs, ACH origination services, gift card programs, rebate programs, travel programs, and tax related programs. Other programs are in the process of development. The remaining grouping under the caption “All Others” consists of the operations of the Company and Meta Trust 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.

   
Retail Banking
  
Meta Payment Systems®
  
All Others
  
Total
 
   
(Dollars in Thousands)
 
Year Ended September 30, 2011
            
Interest income
 $27,249  $11,682  $128  $39,059 
Interest expense
  4,127   153   467   4,747 
Net interest income (loss)
  23,122   11,529   (339)  34,312 
Provision for loan losses
  650   (372)  -   278 
Non-interest income
  3,595   53,486   410   57,491 
Non-interest expense
  23,686   59,179   397   83,262 
Income (loss) before tax
  2,381   6,208   (326)  8,263 
Income tax expense (benefit)
  1,451   2,304   (132)  3,623 
Income (loss)
 $930  $3,904  $(194) $4,640 
                  
Inter-segment revenue (expense)
 $9,890  $(9,890) $-  $- 
Total assets
  308,184   965,388   1,909   1,275,481 
Total deposits
  216,909   925,246   (535)  1,141,620 

   
Retail 
Banking
  
Meta Payment 
Systems®
  
All Others
  
Total
 
   
(Dollars in Thousands)
 
Year Ended September 30, 2010
            
Interest income
 $25,771  $13,267  $45  $39,083 
Interest expense
  5,155   362   476   5,993 
Net interest income (loss)
  20,616   12,905   (431)  33,090 
Provision for loan losses
  4,375   11,416   -   15,791 
Non-interest income
  4,174   93,202   68   97,444 
Non-interest expense
  19,452   74,462   1,016   94,930 
Income (loss) before tax
  963   20,229   (1,379)  19,813 
Income tax expense (benefit)
  367   7,606   (553)  7,420 
Income (loss)
 $596  $12,623  $(826) $12,393 
                  
Inter-segment revenue (expense)
 $9,560  $(9,560) $-  $- 
Total assets
  341,488   685,690   2,588   1,029,766 
Total deposits
  242,969   655,243   (758)  897,454 
 
   
Retail 
Banking
  
Meta Payment 
Systems®
  
All Others
  
Total
 
   
(Dollars in Thousands)
 
Year Ended September 30, 2009
                
Interest income
 $35,083  $9,415  $(7,772) $36,726 
Interest expense
  15,332   844   (7,269)  8,907 
Net interest income (loss)
  19,751   8,571   (503)  27,819 
Provision for loan losses
  10,427   8,286   -   18,713 
Non-interest income
  2,480   77,396   93   79,969 
Non-interest expense
  18,800   71,016   1,265   91,081 
Income (loss) before tax
  (6,996)  6,665   (1,675)  (2,006)
Income tax expense (benefit)
  (2,545)  2,567   (565)  (543)
Income (loss)
 $(4,451) $4,098  $(1,110) $(1,463)
                  
Inter-segment revenue (expense)
 $8,466  $(8,466) $-  $- 
Total assets
  389,053   441,794   3,930   834,777 
Total deposits
  231,961   422,090   (304)  653,747 

The following tables present gross profit data for MPS for the years ended September 30, 2011, 2010 and 2009, respectively.

Fiscal Year Ended September 30,
 
2011
  
2010
  
2009
 
           
Interest income
 $11,682  $13,267  $9,415 
Interest expense
  153   362   844 
Net interest income
  11,529   12,905   8,571 
              
Provision for loan losses
  (372)  11,416   8,286 
Non-interest income
  53,486   93,202   77,396 
Card processing expense
  23,261   38,242   34,350 
Gross Profit
  42,126   56,449   43,331 
              
Other non-interest expense
  35,918   36,220   36,666 
              
Income from operations before tax
  6,208   20,229   6,665 
Income tax expense
  2,304   7,606   2,567 
Income from operations
 $3,904  $12,623  $4,098 
PARENT COMPANY FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL STATEMENTS
NOTE 18. PARENT COMPANY FINANCIAL STATEMENTS

Presented below are condensed financial statements for the parent company, Meta Financial.

CONDENSED STATEMENTS OF FINANCIAL CONDITION
    
        
September 30,
 
2011
  
2010
 
   
(Dollars in Thousands)
 
ASSETS
      
Cash and cash equivalents
 $1,624  $883 
Securities available for sale
  -   658 
Investment in subsidiaries
  88,476   79,146 
Other assets
  881   1,697 
Total assets
 $90,981  $82,384 
          
LIABILITIES AND STOCKHOLDERS' EQUITY
        
          
LIABILITIES
        
Subordinated debentures
 $10,310  $10,310 
Other liabilities
  94   30 
Total liabilities
 $10,404  $10,340 
          
STOCKOLDERS' EQUITY
        
Common stock
  34   34 
Additional paid-in capital
  32,471   32,381 
Retained earnings
  45,494   42,475 
Accumulated other comprehensive income
  6,336   1,599 
Treasury stock, at cost
  (3,758)  (4,445)
Total stockholders' equity
 $80,577  $72,044 
Total liabilities and stockholders' equity
 $90,981  $82,384 

CONDENSED STATEMENTS OF OPERATIONS
         
           
Years ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
Gain on sale of securities available for sale
 $385  $-  $- 
Other income
  153   55   115 
Total income
  538   55   115 
              
Interest expense
  467   487   617 
Other expense
  397   804   1,095 
Total expense
  864   1,291   1,712 
              
Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries
  (326)  (1,236)  (1,597)
              
Income tax benefit
  (132)  (498)  (536)
              
Income (loss) before equity in undistributed net income (loss) of subsidiaries
  (194)  (738)  (1,061)
              
Equity in undistributed net income (loss) of subsidiaries
  4,834   13,130   (402)
              
Net income (loss)
 $4,640  $12,392  $(1,463)
 
CONDENSED STATEMENTS OF CASH FLOWS
   
           
For the Years Ended September 30,
 
2011
  
2010
  
2009
 
   
(Dollars in Thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net income (loss)
 $4,640  $12,393  $(1,463)
Adjustments to reconcile net income to net cash provided by (used in) operating activites
         
Equity in undistributed net income (loss) of subsidiaries
  (4,834)  (13,130)  402 
Gain on sale of securities available for sale
  (385)  -   - 
Change in other assets
  816   (423)  (1,047)
Change in other liabilities
  64   (777)  452 
Other, net
  -   -   5 
Net cash provided by (used in) operating activities
  301   (1,937)  (1,651)
              
CASH FLOWS FROM INVESTING ACTIVITES
            
Investment in subsidiary
  246   -   - 
Capital contributions subsidiaries
  -   (6,157)  - 
Proceeds from the sale of securities available for sale
  1,035   -   - 
Other, net
  3   262   15 
Net cash provided by (used in) investing activites
  1,284   (5,895)  15 
              
CASH FLOWS FROM FINANCING ACTIVITIES
            
Net change in loan payable to subsidiaries
  -   (250)  (250)
Cash dividends paid
  (1,621)  (1,544)  (1,353)
Proceeds from exercise of stock options
  575   1,330   15 
Other, net
  202   9,083   1,224 
Net cash (used in) provided by financing activities
  (844)  8,619   (364)
              
Net change in cash and cash equivalents
 $741  $787  $(2,000)
              
CASH AND CASH EQUIVALENTS
            
Beginning of year
 $883  $96  $2,096 
End of year
 $1,624  $883  $96 

The extent to which the Company may pay cash dividends to stockholders will depend on the cash currently available at the Company, as well as the ability of the Bank to pay dividends to the Company. For further discussion, see Note 14 herein.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

   
QUARTER ENDED
 
   
December 31
  
March 31
  
June 30
  
September 30
 
   
(Dollars in Thousands)
 
              
Fiscal Year 2011
            
Interest income
 $9,620  $9,580  $9,980  $9,879 
Interest expense
  1,342   1,163   1,153   1,089 
Net interest income
  8,278   8,417   8,827   8,790 
Provision for loan losses
  (28)  214   (161)  253 
Income (loss)
  721   2,747   (1,020)  2,192 
Earnings (loss) per common and common equivalent share
                
Basic
 $0.23  $0.88  $(0.33) $0.81 
Diluted
  0.23   0.88   (0.33)  0.81 
Dividend declared per share
  0.13   0.13   0.13   0.13 
                  
Fiscal Year 2010
                
Interest income
 $9,064  $10,383  $10,114  $9,522 
Interest expense
  1,745   1,382   1,456   1,410 
Net interest income
  7,319   9,001   8,658   8,112 
Provision for loan losses
  4,691   9,478   609   1,013 
Income
  1,192   5,174   3,538   2,489 
Earnings per common and common equivalent share
                
Basic
 $0.45  $1.76  $1.15  $0.87 
Diluted
 $0.45  $1.74  $1.11  $0.81 
Dividend declared per share
  0.13   0.13   0.13   0.13 
                  
Fiscal Year 2009
                
Interest income
 $8,726  $10,534  $8,465  $9,001 
Interest expense
  2,565   2,289   2,121   1,932 
Net interest income
  6,161   8,245   6,344   7,069 
Provision for loan losses
  2,129   10,270   6,277   37 
Income (loss)
  673   1,175   (2,582)  (729)
Earnings (loss) per common and common equivalent share
                
Basic
 $0.26  $0.45  $(0.99) $(0.28)
Diluted
 $0.26  $0.45  $(0.99) $(0.28)
Dividend declared per share
  0.13   0.13   0.13   0.13 
FAIR VALUES OF FINANCIAL INSTRUMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS
NOTE 20. FAIR VALUES OF FINANCIAL INSTRUMENTS

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 that are not active 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.

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 or Level 3 securities at September 30, 2011 and 2010. Level 2 securities include agency mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The Company outsources this valuation primarily to a third party provider which utilizes several sources for valuing fixed-income securities. Sources utilized by the third party provider include pricing models that vary based by asset class and include available trade, bid, and other market information. This methodology includes broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs.

The following table summarizes the assets of the Company for which fair values are determined on a recurring basis at September 30, 2011 and 2010.

   
Fair Value at September 30, 2011
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Debt securities
            
Trust preferred and corporate securities
 $22,112  $-  $22,112  $- 
Obligations of states and political subdivisions
  6,218   -   6,218   - 
Mortgage-backed securities
  590,918   -   590,918   - 
Securities available for sale
 $619,248  $-  $619,248  $- 
                  
                  
   
Fair Value at September 30, 2010
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Debt securities
                
Trust preferred and corporate securities
 $17,551  $-  $17,551  $- 
Obligations of states and political subdivisions
  3,916   -   3,916   - 
Mortgage-backed securities
  485,385   -   485,385   - 
Securities available for sale
 $506,852  $-  $506,852  $- 

Foreclosed Real Estate and Repossessed Assets. Real estate properties and repossessed assets are initially recorded at the fair value less selling costs at the date of foreclosure, establishing a new cost basis. The carrying amount at September 30, 2011 represents the lower of the new cost basis or the fair value less selling costs of foreclosed assets that were measured at fair value subsequent to their initial classification as foreclosed assets.

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 as of September 30, 2011.

   
Fair Value at September 30, 2011
 
(Dollars in Thousands)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
              
Foreclosed Assets, net
 $2,671  $-  $2,671  $- 
Loans
  20,200   -   -   20,200 
Total
 $22,871  $-  $2,671  $20,200 
                  
                  
   
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 as of September 30, 2011 and 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 Banks' 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 September 30, 2011 and 2010. The information presented is subject to change over time based on a variety of factors.

September 30,
 
2011
  
2010
 
   
Carrying
  
Estimated
  
Carrying
  
Estimated
 
   
Amount
  
Fair Value
  
Amount
  
Fair Value
 
   
(Dollars in Thousands)
 
              
Financial assets
            
Cash and cash equivalents
 $276,893  $276,893  $87,503  $87,503 
Securities available for sale
  619,248   619,248   506,852   506,852 
Loans receivable, net
  314,410   316,152   366,045   369,301 
FHLB stock
  4,737   4,737   5,283   5,283 
Accrued interest receivable
  4,133   4,133   4,759   4,759 
                  
Financial liabilities
                
Noninterest bearing demand deposits
  945,956   945,956   675,163   675,163 
Interest bearing demand deposits, savings, and money markets
  79,102   79,102   76,219   76,219 
Certificates of deposit
  116,562   118,288   146,072   148,490 
Total deposits
  1,141,620   1,143,346   897,454   899,872 
                  
Advances from FHLB
  11,000   14,128   22,000   25,563 
Securities sold under agreements to repurchase
  8,055   8,055   8,904   8,904 
Subordinated debentures
  10,310   10,325   10,310   10,294 
Accrued interest payable
  223   223   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 September 30, 2011 and 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

Securities available for sale are recorded at fair value on a recurring basis. Fair values for investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities.

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 September 30, 2011 and 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.

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, 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 as of September 30, 2011 and 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 as of September 30, 2011 and 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 21. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of the Company's goodwill and intangible assets for the years ended September 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
  -   478   -   478 
                  
Amortization during the period
  -   -   (77)  (77)
                  
Write-offs during the period
  (1,508)  (241)  -   (1,749)
                  
Balance as of September 30, 2011
 $-  $1,315  $-  $1,315 
                  
                  
                  
   
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
  -   425   231   656 
                  
Amortization during the period
  -   -   (154)  (154)
                  
Dispositions during the period
  -   (54)  -   (54)
                  
Balance as of September 30, 2010
 $1,508  $1,078  $77  $2,663 

The Company had no amortizable intangible assets recorded at September 30, 2011 and had one amortizable intangible asset recorded at September 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 year ended September 30, 2011 of $1.5 million due primarily to the decline in the stock price of the Company at that period. There was no impairment to goodwill and intangible assets during the year ended September 30, 2010.