Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - META FINANCIAL GROUP INCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - META FINANCIAL GROUP INCex32_1.htm
EX-31.2 - EXHIBIT 31.2 - META FINANCIAL GROUP INCex31_2.htm
EX-32.2 - EXHIBIT 32.2 - META FINANCIAL GROUP INCex32_2.htm
EX-31.1 - EXHIBIT 31.1 - META FINANCIAL GROUP INCex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to
 
Commission File Number:  0-22140
 
META FINANCIAL GROUP, INC. ®
(Exact name of registrant as specified in its charter)
 
Delaware
 
42-1406262
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices)
 
(712) 732-4117
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  YES x  NO o .
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  (Check one):
Large accelerated filer o  Accelerated filer x  Non-accelerated filer o  Smaller Reporting Company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES  x NO
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class:
 
Outstanding at July 28, 2014:
Common Stock, $.01 par value
 
6,184,047 Common Shares
 


META FINANCIAL GROUP, INC.
FORM 10-Q
 
Table of Contents
 
2
 
Item 1.
2
 
 
2
 
 
3
 
 
4
 
 
5
 
 
6
 
 
7
 
Item 2.
38
 
Item 3.
50
 
Item 4.
54
 
56
 
Item 1.
56
 
Item 1A.
56
 
Item 2.
57
 
Item 3.
57
 
Item 4.
57
 
Item 5.
57
 
Item 6.
57
 
58

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements

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

ASSETS
 
June 30,
2014
   
September 30,
2013
 
 
 
   
 
Cash and cash equivalents
 
$
30,861
   
$
40,063
 
Investment securities available for sale
   
433,017
     
299,821
 
Mortgage-backed securities available for sale
   
603,412
     
581,372
 
Investment securities held to maturity
   
209,147
     
211,099
 
Mortgage-backed securities held to maturity
   
72,102
     
76,927
 
Loans receivable - net of allowance for loan losses of $4,895 at June 30, 2014 and $3,930 at September 30, 2013
   
471,940
     
380,428
 
Federal Home Loan Bank Stock, at cost
   
16,845
     
9,994
 
Accrued interest receivable
   
10,868
     
8,582
 
Insurance receivable
   
400
     
400
 
Premises, furniture, and equipment, net
   
16,770
     
17,664
 
Bank-owned life insurance
   
35,183
     
33,830
 
Foreclosed real estate and repossessed assets
   
116
     
116
 
Intangible assets
   
2,485
     
2,339
 
Prepaid assets
   
8,452
     
8,539
 
Deferred taxes
   
7,355
     
14,297
 
MPS accounts receivable
   
3,119
     
3,707
 
Assets held for sale
   
-
     
1,120
 
Other assets
   
1,261
     
1,691
 
 
               
Total assets
 
$
1,923,333
   
$
1,691,989
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
LIABILITIES
               
Non-interest-bearing checking
 
$
1,123,013
   
$
1,086,258
 
Interest-bearing checking
   
33,964
     
31,181
 
Savings deposits
   
28,521
     
26,229
 
Money market deposits
   
43,480
     
40,016
 
Time certificates of deposit
   
117,081
     
131,599
 
Total deposits
   
1,346,059
     
1,315,283
 
Advances from Federal Home Loan Bank
   
7,000
     
7,000
 
Federal funds purchased
   
360,000
     
190,000
 
Securities sold under agreements to repurchase
   
8,478
     
9,146
 
Subordinated debentures
   
10,310
     
10,310
 
Accrued interest payable
   
299
     
291
 
Contingent liability
   
331
     
331
 
Accrued expenses and other liabilities
   
21,638
     
16,644
 
Total liabilities
   
1,754,115
     
1,549,005
 
 
               
STOCKHOLDERS’ EQUITY
               
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2014 and September 30, 2013, respectively
   
-
     
-
 
Common stock, $.01 par value; 10,000,000 shares authorized,6,184,047 and 6,132,744 shares issued, 6,139,672 and 6,070,654 shares outstanding at June 30, 2014 and September 30, 2013, respectively
   
62
     
61
 
Additional paid-in capital
   
94,069
     
92,963
 
Retained earnings
   
81,231
     
71,268
 
Accumulated other comprehensive income (loss)
   
(5,417
)
   
(20,285
)
Treasury stock, 44,375 and 62,090 common shares, at cost, at June 30, 2014 and September 30, 2013, respectively
   
(727
)
   
(1,023
)
Total stockholders’ equity
   
169,218
     
142,984
 
 
               
Total liabilities and stockholders’ equity
 
$
1,923,333
   
$
1,691,989
 

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

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
   
   
   
 
  
 
2014
   
2013
   
2014
   
2013
 
 
 
   
   
   
 
Interest and dividend income:
 
   
   
   
 
Loans receivable, including fees
 
$
5,062
   
$
4,091
   
$
14,283
   
$
11,953
 
Mortgage-backed securities
   
3,898
     
3,024
     
11,506
     
9,069
 
Other investments
   
3,606
     
2,710
     
10,001
     
8,151
 
 
   
12,566
     
9,825
     
35,790
     
29,173
 
Interest expense:
                               
Deposits
   
232
     
286
     
726
     
995
 
FHLB advances and other borrowings
   
406
     
380
     
1,105
     
1,317
 
 
   
638
     
666
     
1,831
     
2,312
 
 
                               
Net interest income
   
11,928
     
9,159
     
33,959
     
26,861
 
 
                               
Provision (recovery) for loan losses
   
300
     
-
     
600
     
(300
)
 
                               
Net interest income after provision for loan losses
   
11,628
     
9,159
     
33,359
     
27,161
 
 
                               
Non-interest income:
                               
Card fees
   
11,805
     
12,547
     
36,753
     
38,043
 
Loan fees
   
183
     
188
     
828
     
690
 
Bank-owned life insurance
   
283
     
289
     
853
     
707
 
Deposit fees
   
159
     
150
     
456
     
472
 
Gain (loss) on sale of securities available for sale, net (Includes $0 and $97 reclassified from accumulated other comprehensive income (loss) for net gains on available for sale securities for the threeand nine months ended June 30, 2014, respectively)
   
(0
)
   
525
     
97
     
2,501
 
Gain (loss) on foreclosed real estate
   
1
     
39
     
6
     
(274
)
Other income
   
50
     
(179
)
   
138
     
(75
)
Total non-interest income
   
12,481
     
13,559
     
39,131
     
42,064
 
 
                               
Non-interest expense:
                               
Compensation and benefits
   
9,318
     
8,524
     
28,288
     
25,917
 
Card processing
   
3,850
     
3,480
     
11,668
     
12,143
 
Occupancy and equipment
   
2,309
     
2,188
     
6,858
     
6,195
 
Legal and consulting
   
540
     
1,183
     
2,706
     
2,957
 
Data processing
   
320
     
299
     
992
     
910
 
Marketing
   
267
     
276
     
700
     
747
 
Impairment on assets held for sale
   
-
     
-
     
-
     
361
 
Other expense
   
2,233
     
2,074
     
6,429
     
7,457
 
Total non-interest expense
   
18,837
     
18,024
     
57,641
     
56,687
 
 
                               
Income before income tax expense
   
5,272
     
4,694
     
14,849
     
12,538
 
Income tax expense (Includes $0 and $35 income tax expense reclassified from accumulated other comprehensive income (loss) for the three and nine months ended June 30, 2014, respectively)
   
1,068
     
1,022
     
2,500
     
2,594
 
 
                               
Net income
 
$
4,204
   
$
3,672
   
$
12,349
   
$
9,944
 
 
                               
Earnings per common share:
                               
Basic
 
$
0.69
   
$
0.67
   
$
2.02
   
$
1.81
 
Diluted
 
$
0.68
   
$
0.66
   
$
1.99
   
$
1.80
 

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

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
   
   
   
 
   
 
2014
   
2013
   
2014
   
2013
 
 
 
   
   
   
 
 
 
   
   
   
 
Net income
 
$
4,204
   
$
3,672
   
$
12,349
   
$
9,944
 
 
                               
Other comprehensive income (loss):
                               
Change in net unrealized gain (loss) on securities
   
15,837
     
(29,219
)
   
23,581
     
(40,666
)
Losses (gains) realized in net income
   
-
     
(525
)
   
(97
)
   
(2,501
)
 
   
15,837
     
(29,744
)
   
23,484
     
(43,167
)
Deferred income tax effect
   
5,769
     
(11,624
)
   
8,616
     
(16,759
)
Total other comprehensive income (loss)
   
10,068
     
(18,120
)
   
14,868
     
(26,408
)
Total comprehensive income (loss)
 
$
14,272
   
$
(14,448
)
 
$
27,217
   
$
(16,464
)

See Notes to Condensed Consolidated Financial Statements.
META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended June 30, 2014 and 2013
(Dollars in Thousands, Except Share and Per Share Data)

 
 
   
   
   
Accumulated
   
   
 
 
 
   
Additional
   
   
Other
   
   
Total
 
 
 
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
Stockholders’
 
  
 
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
 
 
 
   
   
   
   
   
 
Balance, September 30, 2012
 
$
56
   
$
78,769
   
$
60,776
   
$
8,513
   
$
(2,255
)
 
$
145,859
 
 
                                               
Cash dividends declared on common stock ($0.39 per share)
   
-
     
-
     
(2,141
)
   
-
     
-
     
(2,141
)
 
                                               
Issuance of common shares from the sales of equity securities
   
-
     
(318
)
   
-
     
-
     
-
     
(318
)
 
                                               
Issuance of 54,033 common shares from treasury stock due to issuance of restricted stock
   
-
     
(72
)
   
-
     
-
     
1,046
     
974
 
 
                                               
Stock compensation
   
-
     
125
     
-
     
-
     
-
     
125
 
 
                                               
Net change in unrealized losses on securities, net of income taxes
   
-
     
-
     
-
     
(26,408
)
   
-
     
(26,408
)
 
                                               
Net income
   
-
     
-
     
9,944
     
-
     
-
     
9,944
 
  
                                               
Balance, June 30, 2013
 
$
56
   
$
78,504
   
$
68,579
   
$
(17,895
)
 
$
(1,209
)
 
$
128,035
 
 
                                               
Balance, September 30, 2013
 
$
61
   
$
92,963
   
$
71,268
   
$
(20,285
)
 
$
(1,023
)
 
$
142,984
 
 
                                               
Cash dividends declared on common stock ($0.39 per share)
   
-
     
-
     
(2,386
)
   
-
     
-
     
(2,386
)
 
                                               
Issuance of common shares from the sales of equity securities
   
1
     
(52
)
   
-
     
-
     
-
     
(51
)
 
Issuance of 17,715 common shares from treasury stock due to exercise of stock options
   
-
     
1,026
     
-
     
-
     
296
     
1,322
 
 
Stock compensation
   
-
     
132
     
-
     
-
     
-
     
132
 
 
Net change in unrealized losses on securities, net of income taxes
   
-
     
-
     
-
     
14,868
     
-
     
14,868
 
 
                                               
Net income
   
-
     
-
     
12,349
     
-
     
-
     
12,349
 
   
                                               
Balance, June 30, 2014
 
$
62
   
$
94,069
   
$
81,231
   
$
(5,417
)
 
$
(727
)
 
$
169,218
 

See Notes to Condensed Consolidated Financial Statements.

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

 
 
Nine Months Ended June 30,
 
 
 
2014
   
2013
 
 
 
   
 
Cash flows from operating activities:
 
   
 
Net income
 
$
12,349
   
$
9,944
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation, amortization and accretion, net
   
13,580
     
15,850
 
Provision (recovery) for loan losses
   
600
     
(300
)
Provision (recovery) for deferred taxes
   
(1,675
)
   
-
 
(Gain) loss on other assets
   
(39
)
   
67
 
(Gain) loss on sale of securities available for sale, net
   
(97
)
   
(2,501
)
Net change in accrued interest receivable
   
(2,286
)
   
(2,078
)
Impairment on assets held for sale
   
-
     
361
 
Net change in other assets
   
(490
)
   
(22,435
)
Net change in accrued interest payable
   
8
     
97
 
Net change in accrued expenses and other liabilities
   
4,994
     
(26,797
)
Net cash provided by (used in) operating activities
   
26,944
     
(27,792
)
 
               
Cash flows from investing activities:
               
Purchase of securities available for sale
   
(267,616
)
   
(468,103
)
Proceeds from sales of securities available for sale
   
68,167
     
182,156
 
Proceeds from maturities and principal repayments of securities available for sale
   
60,031
     
155,390
 
Purchase of securities held to maturity
   
(10,684
)
   
(5,576
)
Proceeds from maturities and principal repayments of securities held to maturity
   
14,858
     
-
 
Purchase of bank owned life insurance
   
(500
)
   
(18,000
)
Loans purchased
   
(1,816
)
   
(10,446
)
Net change in loans receivable
   
(90,296
)
   
(1,435
)
Proceeds from sales of foreclosed real estate
   
-
     
431
 
Federal Home Loan Bank stock purchases
   
(311,171
)
   
(309,358
)
Federal Home Loan Bank stock redemptions
   
304,320
     
306,160
 
Proceeds from the sale of premises and equipment
   
1,169
     
-
 
Purchase of premises and equipment
   
(1,733
)
   
(4,427
)
Net cash provided by (used in) investing activities
   
(235,271
)
   
(173,208
)
 
               
Cash flows from financing activities:
               
Net change in checking, savings, and money market deposits
   
45,294
     
19,845
 
Net change in time deposits
   
(14,518
)
   
16,238
 
Repayment of FHLB and other borrowings
   
-
     
(4,000
)
Proceeds from federal funds purchased
   
170,000
     
65,000
 
Net change in securities sold under agreements to repurchase
   
(668
)
   
(13,275
)
Cash dividends paid
   
(2,386
)
   
(2,141
)
Stock compensation
   
132
     
125
 
Proceeds from issuance of common stock
   
1,271
     
656
 
Net cash provided by (used in) financing activities
   
199,125
     
82,448
 
 
               
Net change in cash and cash equivalents
   
(9,202
)
   
(118,552
)
 
               
Cash and cash equivalents at beginning of period
   
40,063
     
145,051
 
Cash and cash equivalents at end of period
 
$
30,861
   
$
26,499
 
 
               
Supplemental disclosure of cash flow information
               
Cash paid during the period for:
               
Interest
 
$
1,824
   
$
2,763
 
Income taxes
   
3,262
     
3,408
 
 
               
Supplemental schedule of non-cash investing activities:
               
Loans transferred to foreclosed real estate
 
$
-
   
$
48
 
Assets transferred to held for sale
   
-
     
1,708
 
Securities transferred from available for sale to held to maturity
   
-
     
282,195
 

See Notes to Condensed Consolidated Financial Statements.
NOTE 1. BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2013 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 16, 2013.  Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.
 
The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the three and nine month periods ended June 30, 2014, are not necessarily indicative of the results expected for the year ending September 30, 2014.
 
NOTE 2. CREDIT DISCLOSURES
 
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.
 
The allowance consists of specific, general, and unallocated components.  The specific component relates to impaired loans.  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 homogenous loans are collectively evaluated for impairment.  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.  Non-accrual loans and all troubled debt restructurings are considered impaired.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans receivable at June 30, 2014 and September 30, 2013 are as follows:

 
 
June 30,  2014
   
September 30, 2013
 
 
 
(Dollars in Thousands)
 
 
 
   
 
One to four family residential mortgage loans
 
$
108,713
   
$
82,287
 
Commercial and multi-family real estate loans
   
216,904
     
192,786
 
Agricultural real estate loans
   
56,945
     
29,552
 
Consumer loans
   
29,379
     
30,314
 
Commercial operating loans
   
26,683
     
16,264
 
Agricultural operating loans
   
38,958
     
33,750
 
Total Loans Receivable
   
477,582
     
384,953
 
 
               
Less:
               
Allowance for loan losses
   
(4,895
)
   
(3,930
)
Net deferred loan origination fees
   
(747
)
   
(595
)
Total Loans Receivable, Net
 
$
471,940
   
$
380,428
 

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and nine month periods ended June 30, 2014 and 2013 is as follows:

 
 
1-4 Family Residential
   
Commercial and Multi-Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Operating
   
Agricultural Operating
   
Unallocated
   
Total
 
 
 
   
   
   
   
   
   
   
 
Three Months Ended June 30, 2014
 
   
   
   
   
   
   
   
 
 
 
   
   
   
   
   
   
   
 
Allowance for loan losses:
 
   
   
   
   
   
   
   
 
Beginning balance
 
$
287
   
$
1,666
   
$
235
   
$
71
   
$
66
   
$
478
   
$
1,769
   
$
4,572
 
Provision (recovery) for loan losses
   
(74
)
   
23
     
112
     
6
     
14
     
277
     
(58
)
   
300
 
Loan charge offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Recoveries
   
2
     
19
     
-
     
-
     
-
     
2
     
-
     
23
 
Ending balance
 
$
215
   
$
1,708
   
$
347
   
$
77
   
$
80
   
$
757
   
$
1,711
   
$
4,895
 
 
                                                               
Nine Months Ended June 30, 2014
                                                               
 
                                                               
Allowance for loan losses:
                                                               
Beginning balance
 
$
333
   
$
1,937
   
$
112
   
$
74
   
$
49
   
$
267
   
$
1,158
   
$
3,930
 
Provision (recovery) for loan losses
   
(120
)
   
(576
)
   
235
     
3
     
31
     
474
     
553
     
600
 
Loan charge offs
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Recoveries
   
2
     
347
     
-
     
-
     
-
     
16
     
-
     
365
 
Ending balance
 
$
215
   
$
1,708
   
$
347
   
$
77
   
$
80
   
$
757
   
$
1,711
   
$
4,895
 
 
                                                               
 
                                                               
Ending balance: individually evaluated for impairment
   
-
     
358
     
-
     
-
     
-
     
-
     
-
     
358
 
Ending balance: collectively evaluated for impairment
   
215
     
1,350
     
347
     
77
     
80
     
757
     
1,711
     
4,537
 
Total
 
$
215
   
$
1,708
   
$
347
   
$
77
   
$
80
   
$
757
   
$
1,711
   
$
4,895
 
 
                                                               
Loans:
                                                               
Ending balance: individually evaluated for impairment
   
389
     
5,678
     
-
     
-
     
28
     
-
     
-
     
6,095
 
Ending balance: collectively evaluated for impairment
   
108,324
     
211,226
     
56,945
     
29,379
     
26,655
     
38,958
     
-
     
471,487
 
Total
 
$
108,713
   
$
216,904
   
$
56,945
   
$
29,379
   
$
26,683
   
$
38,958
   
$
-
   
$
477,582
 

 
 
1-4 Family Residential
   
Commercial and Multi-Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Operating
   
Agricultural Operating
   
Unallocated
   
Total
 
 
 
   
   
   
   
   
   
   
 
Three Months Ended June 30, 2013
 
   
   
   
   
   
   
   
 
 
 
   
   
   
   
   
   
   
 
Allowance for loan losses:
 
   
   
   
   
   
   
   
 
Beginning balance
 
$
265
   
$
2,329
   
$
1
   
$
4
   
$
25
   
$
17
   
$
1,065
   
$
3,706
 
Provision (recovery) for loan losses
   
92
     
(563
)
   
34
     
-
     
(47
)
   
154
     
330
     
-
 
Loan charge offs
   
(25
)
   
(128
)
   
-
     
-
     
-
     
-
     
-
     
(153
)
Recoveries
   
-
     
94
     
-
     
-
     
23
     
-
     
-
     
117
 
Ending balance
 
$
332
   
$
1,732
   
$
35
   
$
4
   
$
1
   
$
171
   
$
1,395
   
$
3,670
 
 
                                                               
Nine Months Ended June 30, 2013
                                                               
 
                                                               
Allowance for loan losses:
                                                               
Beginning balance
 
$
193
   
$
3,113
   
$
1
   
$
3
   
$
49
   
$
-
   
$
612
   
$
3,971
 
Provision (recovery) for loan losses
   
164
     
(1,341
)
   
34
     
-
     
(111
)
   
171
     
783
     
(300
)
Loan charge offs
   
(25
)
   
(136
)
   
-
     
-
     
-
     
-
     
-
     
(161
)
Recoveries
   
-
     
96
     
-
     
1
     
63
     
-
     
-
     
160
 
Ending balance
 
$
332
   
$
1,732
   
$
35
   
$
4
   
$
1
   
$
171
   
$
1,395
   
$
3,670
 
 
                                                               
 
                                                               
Ending balance: individually evaluated for impairment
   
25
     
409
     
-
     
-
     
-
     
-
     
-
     
434
 
Ending balance: collectively evaluated for impairment
   
307
     
1,323
     
35
     
4
     
1
     
171
     
1,395
     
3,236
 
Total
 
$
332
   
$
1,732
   
$
35
   
$
4
   
$
1
   
$
171
   
$
1,395
   
$
3,670
 
 
                                                               
Loans:
                                                               
Ending balance: individually evaluated for impairment
   
618
     
8,383
     
-
     
-
     
53
     
-
     
-
     
9,054
 
Ending balance: collectively evaluated for impairment
   
75,544
     
153,587
     
28,567
     
30,763
     
15,766
     
29,941
     
-
     
334,168
 
Total
 
$
76,162
   
$
161,970
   
$
28,567
   
$
30,763
   
$
15,819
   
$
29,941
   
$
-
   
$
343,222
 
 
Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.”  The loan classification and risk rating definitions are as follows:

Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

Watch- A watch asset is generally credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures.  Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention.  These assets are of better quality than special mention assets.

Special Mention- Special mention assets are credits with potential weaknesses deserving management’s close attention and if left uncorrected, may result in deterioration of the repayment prospects for the asset.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.

The adverse classifications are as follows:

Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position.  Assets so classified will have well-defined weaknesses creating a distinct possibility the Bank will sustain some loss if the weaknesses are not corrected.  Loss potential does not have to exist for an asset to be classified as substandard.
Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort.  Due to pending factors the asset’s classification as loss is not yet appropriate.

Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is no longer warranted.  This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
 
The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location, or an occupation.  Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Bank’s Tier 1 Capital plus the Allowance for Loan Losses.
The asset classification of loans at June 30, 2014 and September 30, 2013 are as follows:

June 30, 2014

 
 
1-4 Family Residential
   
Commercial and Multi-Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Operating
   
Agricultural Operating
   
Total
 
 
 
   
   
   
   
   
   
 
Pass
 
$
108,074
   
$
211,846
   
$
52,832
   
$
29,379
   
$
26,683
   
$
28,845
   
$
457,659
 
Watch
   
312
     
855
     
274
     
-
     
-
     
307
     
1,748
 
Special Mention
   
82
     
98
     
2,085
     
-
     
-
     
451
     
2,716
 
Substandard
   
245
     
4,105
     
1,754
     
-
     
-
     
9,355
     
15,459
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
 
 
$
108,713
   
$
216,904
   
$
56,945
   
$
29,379
   
$
26,683
   
$
38,958
   
$
477,582
 

September 30, 2013

 
 
1-4 Family Residential
   
Commercial and Multi-Family Real Estate
   
Agricultural Real Estate
   
Consumer
   
Commercial Operating
   
Agricultural Operating
   
Total
 
 
 
   
   
   
   
   
   
 
Pass
 
$
81,719
   
$
177,513
   
$
26,224
   
$
30,314
   
$
16,251
   
$
26,362
   
$
358,383
 
Watch
   
239
     
7,791
     
3,328
     
-
     
13
     
1,690
     
13,061
 
Special Mention
   
84
     
102
     
-
     
-
     
-
     
5,698
     
5,884
 
Substandard
   
245
     
7,380
     
-
     
-
     
-
     
-
     
7,625
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
 
 
$
82,287
   
$
192,786
   
$
29,552
   
$
30,314
   
$
16,264
   
$
33,750
   
$
384,953
 
One- to Four-Family Residential Mortgage Lending.   One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals.  The Company offers fixed-rate and adjustable rate mortgage (“ARM”) loans for both permanent structures and those under construction.  The Company’s one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
 
The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan‑to‑value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.
 
The Company currently offers five and ten year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, such loans adjust annually.  These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as the Company’s cost of funds on retail bank deposits.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into a fixed rate loan.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed-rate residential loans.  The current low mortgage interest rate environment makes ARM loans relatively unattractive and very few are currently being originated.
 
Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.
 
In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.
 
Commercial and Multi-Family Real Estate Lending.  The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan and participation interests in loans from other financial institutions.  The purchased loans and loan participation interests are generally secured by properties primarily located in the Midwest.
 
The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally are underwritten with terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by personal guarantees of the borrowers.  The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio.  Commercial and multi-family real estate loans provide for a margin over a number of different indices.  In underwriting these loans, the Company currently analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.  Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.
Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
 
Agricultural Lending.  The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm-related products.  Agricultural operating loans are originated at either an adjustable or fixed-rate of interest for up to a one year term or, in the case of livestock, upon sale.  Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year.  Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.
 
Agricultural real estate loans are frequently originated with adjustable rates of interest.  Generally, such loans provide for a fixed rate of interest for the first five to ten years, which then balloon or adjust annually thereafter.  In addition, such loans generally amortize over a period of 20 to 25 years.  Fixed-rate agricultural real estate loans generally have terms up to ten years.  Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
 
Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one- to four-family residential lending.  Agricultural lending involves a greater degree of risk than one- to four-family residential mortgage loans because of the typically larger loan amount.  In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.  The success of the loan may also be affected by many factors outside the control of the borrower.
 
Weather presents one of the greatest risks as hail, drought, floods, or other conditions, can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral.  This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment.  Government support programs and the Company generally require that farmers procure crop insurance coverage.  Grain and livestock prices also present a risk as prices may decline prior to sale resulting in a failure to cover production costs.  These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk.  The Company frequently requires borrowers to use futures contracts or options to reduce price risk and help ensure loan repayment.  Another risk is the uncertainty of government programs and other regulations.  During periods of low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result.  Finally, many farms are dependent on a limited number of key individuals upon whose injury or death may result in an inability to successfully operate the farm.
 
Consumer Lending – Retail Bank.  The Company, through the auspices of its “Retail Bank”, originates a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Retail Bank offers other secured and unsecured consumer loans.  The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas.
 
The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail Bank will lend amounts which, together with all prior liens, may be up to 90% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.
The Retail Bank primarily originates automobile loans on a direct basis.  Direct loans are loans made when the Retail Bank extends credit directly to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers.  The Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles.  Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.
 
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.
 
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
 
Consumer Lending- Meta Payment Systems (“MPS”).  MPS offers portfolio lending on a nationwide basisMPS has a loan committee consisting of members of Executive Management and other officers.  This committee, known as the MPS Credit Committee, is charged with monitoring, evaluating, and reporting portfolio performance and the overall credit risk posed by its credit products. All proposed credit programs must first be reviewed and approved by the committee before such programs are presented to the Bank’s Board of Directors for approval.  The Board of Directors of the Bank is ultimately responsible for final approval of any credit program and, under the terms of a Consent Order, must seek prior permission from the Bank’s primary federal regulator to originate new credit programs.
 
The Company believes that well-managed, nationwide credit programs can help meet legitimate credit needs for prime and sub-prime borrowers, and affords the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to economic downturns.  Therefore, subject to the Consent Order referenced above, MPS designs and administers certain credit programs that seek to accomplish these objectives.
 
MPS strives to offer consumers innovative payment products, including credit products.  Most credit products have fallen into the category of portfolio lending.  MPS continues to work on new alternative portfolio lending products striving to serve its core customer base and provide unique and innovative lending solutions to the unbanked and under-banked segment.  This effort has been supported by recent enhancements to the MPS Credit Policy for Portfolio Lending Programs.
 
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 requires the Bank to be indemnified 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 strives to employ policies, procedures, and information systems that it believes are commensurate with the added risk and exposure.  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.
 
The MPS Credit Committee is responsible for monitoring, identifying and evaluating the credit concentrations attributable to MPS, to determine the potential risk to the Bank.  An evaluation includes the following:
· A recommendation regarding additional controls needed to mitigate the concentration exposure.
 
· A limitation or cap placed on the size of the concentration.
 
· The potential necessity for increased capital and/or credit reserves to cover the increased risk caused by the concentration(s).
 
· A strategy to reduce to acceptable levels those concentration(s) that are determined to create undue risk to the Bank.
 
Pursuant to the terms of its Consent Order, the Bank adopted a new concentration policy including enhanced risk analysis, monitoring and management for its respective concentration limits.
 
Commercial Operating LendingThe Company also originates commercial operating loans.  Most of the Company’s commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable.  Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.
 
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan.  The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than more traditional lending activities.
 
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment).  The Company’s commercial operating loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
 
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 reversed against current income.  The loan will remain on a non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance.
Past due loans at June 30, 2014 and September 30, 2013 are as follows:
 
June 30, 2014
 
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Non-Accrual Loans
   
Total Loans Receivable
 
 
 
   
   
   
   
   
   
 
Residential 1-4 Family
 
$
86
   
$
4
   
$
-
   
$
90
   
$
108,341
   
$
282
   
$
108,713
 
Commercial Real Estate and Multi-Family
   
-
     
-
     
-
     
-
     
216,591
     
313
     
216,904
 
Agricultural Real Estate
   
-
     
-
     
-
     
-
     
56,945
     
-
     
56,945
 
Consumer
   
208
     
-
     
34
     
242
     
29,137
     
-
     
29,379
 
Commercial Operating
   
-
     
-
     
-
     
-
     
26,683
     
-
     
26,683
 
Agricultural Operating
   
363
     
-
     
-
     
363
     
38,595
     
-
     
38,958
 
Total
 
$
657
   
$
4
   
$
34
   
$
695
   
$
476,292
   
$
595
   
$
477,582
 

September 30, 2013
 
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Non-Accrual Loans
   
Total Loans Receivable
 
 
 
   
   
   
   
   
   
 
Residential 1-4 Family
 
$
53
   
$
-
   
$
245
   
$
298
   
$
81,744
   
$
245
   
$
82,287
 
Commercial Real Estate and Multi-Family
   
102
     
-
     
107
     
209
     
192,150
     
427
     
192,786
 
Agricultural Real Estate
   
1,169
     
-
     
-
     
1,169
     
28,383
     
-
     
29,552
 
Consumer
   
29
     
21
     
13
     
63
     
30,251
     
-
     
30,314
 
Commercial Operating
   
-
     
-
     
-
     
-
     
16,257
     
7
     
16,264
 
Agricultural Operating
   
-
     
-
     
-
     
-
     
33,750
     
-
     
33,750
 
Total
 
$
1,353
   
$
21
   
$
365
   
$
1,739
   
$
382,535
   
$
679
   
$
384,953
 

Impaired loans at June 30, 2014 and September 30, 2013 are as follows:

 
 
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
 
June 30, 2014
 
   
   
 
 
 
   
   
 
Loans without a specific valuation allowance
 
   
   
 
Residential 1-4 Family
 
$
389
   
$
389
   
$
-
 
Commercial Real Estate and Multi-Family
   
4,391
     
4,391
     
-
 
Agricultural Real Estate
   
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
 
Commercial Operating
   
28
     
28
     
-
 
Agricultural Operating
   
-
     
-
     
-
 
Total
 
$
4,808
   
$
4,808
   
$
-
 
Loans with a specific valuation allowance
                       
Residential 1-4 Family
 
$
-
   
$
-
   
$
-
 
Commercial Real Estate and Multi-Family
   
1,287
     
1,287
     
358
 
Agricultural Real Estate
   
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
 
Commercial Operating
   
-
     
-
     
-
 
Agricultural Operating
   
-
     
-
     
-
 
Total
 
$
1,287
   
$
1,287
   
$
358
 

 
 
Recorded Balance
   
Unpaid Principal Balance
   
Specific Allowance
 
September 30, 2013
 
   
   
 
 
 
   
   
 
Loans without a specific valuation allowance
 
   
   
 
Residential 1-4 Family
 
$
359
   
$
359
   
$
-
 
Commercial Real Estate and Multi-Family
   
4,527
     
4,535
     
-
 
Agricultural Real Estate
   
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
 
Commercial Operating
   
45
     
60
     
-
 
Agricultural Operating
   
-
     
-
     
-
 
Total
 
$
4,931
   
$
4,954
   
$
-
 
Loans with a specific valuation allowance
                       
Residential 1-4 Family
 
$
282
   
$
282
   
$
25
 
Commercial Real Estate and Multi-Family
   
2,107
     
2,107
     
404
 
Agricultural Real Estate
   
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
 
Commercial Operating
   
-
     
-
     
-
 
Agricultural Operating
   
-
     
-
     
-
 
Total
 
$
2,389
   
$
2,389
   
$
429
 
The following table provides the average recorded investment in impaired loans for the three and nine month periods ended June 30, 2014 and 2013.
 
 
 
Three Months Ended June 30,
   
Nine Months Ended June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
 
Average Recorded Investment
   
Average Recorded Investment
   
Average Recorded Investment
   
Average Recorded Investment
 
 
 
   
   
   
 
 
 
   
   
   
 
Residential 1-4 Family
 
$
579
   
$
661
   
$
636
   
$
586
 
Commercial Real Estate and Multi-Family
   
5,694
     
9,049
     
6,811
     
8,707
 
Agricultural Real Estate
   
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
1
 
Commercial Operating
   
29
     
57
     
37
     
51
 
Agricultural Operating
   
-
     
-
     
-
     
-
 
Total
 
$
6,302
   
$
9,767
   
$
7,484
   
$
9,345
 

The Company’s troubled debt restructurings (“TDR”) typically involve forgiving a portion of interest or principal on existing loans or making loans at a rate materially less than current market rates. There were no loans modified in a TDR during the three and nine month periods ended June 30, 2014 and 2013.  Additionally, there were no TDR loans for which there was a payment default during the three and nine month periods ended June 30, 2014 and 2013 that had been modified during the 12-month period prior to the default.
NOTE 3. ALLOWANCE FOR LOAN LOSSES
 
At June 30, 2014, the Company’s allowance for loan losses was $4.9 million, an increase of $1.0 million from $3.9 million at September 30, 2013.  During the nine months ended June 30, 2014, the Company recorded a provision for loan losses of $0.6 million. In addition, the Company had $0.4 million net recoveries for the 2014 nine month period.
 
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.
 
The Company establishes its provision for loan losses, and evaluates the adequacy of its allowance for loan losses based upon a systematic methodology consisting of a number of factors including, among others, historic loss experience, the overall level of classified assets, non-performing loans, TDR loans, the composition of its loan portfolio and the general economic environment within which the Company and its borrowers operate.

The allowance for loan losses established by MPS results from an estimation process that evaluates relevant characteristics of its credit portfolio(s).  MPS also considers other internal and external environmental factors such as changes in operations or personnel and economic events that may affect the adequacy of the allowance for credit losses. Adjustments to the allowance for loan losses are recorded periodically based on the result of this estimation process.  The exact methodology to determine the allowance for loan losses for each program will not be identical. Each program may have differing attributes including such factors as levels of risk, definitions of delinquency and loss, inclusion/exclusion of credit bureau criteria, roll rate migration dynamics, and other factors. Similarly, the additional capital required to offset the increased risk in subprime lending activities may vary by credit program. Each program is evaluated separately.

Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, the current level of the allowance for loan losses at June 30, 2014 reflects an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination of the allowance for loan losses is subject to review by its regulatory agencies, the OCC and the Federal Reserve, which can require the establishment of additional general or specific allowances.
 
NOTE 4. 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 Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for EPS calculations, as they are committed to be released; unallocated ESOP shares are not considered outstanding.  All ESOP shares were allocated as of June 30, 2014 and September 30, 2013.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.
 
A reconciliation of net income and common stock share amounts used in the computation of basic and diluted EPS for the three and nine months ended June 30, 2014 and 2013 is presented below.
Three Months Ended June 30,
 
2014
   
2013
 
(Dollars in Thousands, Except Share and Per Share Data)
 
   
 
 
 
   
 
Earnings
 
   
 
Net Income
 
$
4,204
   
$
3,672
 
 
               
Basic EPS
               
Weighted average common shares outstanding
   
6,132,169
     
5,499,506
 
Less weighted average nonvested shares
   
(4,000
)
   
-
 
Weighted average common shares outstanding
   
6,128,169
     
5,499,506
 
 
               
Earnings Per Common Share
               
Basic
 
$
0.69
   
$
0.67
 
 
               
Diluted EPS
               
Weighted average common shares outstanding for basic earnings per common share
   
6,128,169
     
5,499,506
 
Add dilutive effect of assumed exercises of stock options, net of tax benefits
   
77,201
     
54,118
 
Weighted average common and dilutive potential common shares outstanding
   
6,205,370
     
5,553,624
 
 
               
Earnings Per Common Share
               
Diluted
 
$
0.68
   
$
0.66
 
 
 
Nine Months Ended June 30,
 
2014
   
2013
 
(Dollars in Thousands, Except Share and Per Share Data)
 
   
 
 
 
   
 
Earnings
 
   
 
Net Income
 
$
12,349
   
$
9,944
 
 
               
Basic EPS
               
Weighted average common shares outstanding
   
6,109,955
     
5,484,060
 
Less weighted average unallocated ESOP and nonvested shares
   
(4,401
)
   
-
 
Weighted average common shares outstanding
   
6,105,554
     
5,484,060
 
 
               
Earnings Per Common Share
               
Basic
 
$
2.02
   
$
1.81
 
 
               
Diluted EPS
               
Weighted average common shares outstanding for basic earnings per common share
   
6,105,554
     
5,484,060
 
Add dilutive effect of assumed exercises of stock options, net of tax benefits
   
91,409
     
41,560
 
Weighted average common and dilutive potential common shares outstanding
   
6,196,963
     
5,525,620
 
 
               
Earnings Per Common Share
               
Diluted
 
$
1.99
   
$
1.80
 

Stock options totaling 29,199 were not considered in computing diluted EPS for the three and nine months ended June 30, 2014, respectively, because they were not dilutive.  Stock options totaling 134,415 and 89,583 were not considered in computing diluted EPS for the three and nine months ended June 30, 2013, respectively, because they were not dilutive.
NOTE 5.
SECURITIES
 
The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale and held to maturity securities at June 30, 2014 and September 30, 2013 are presented below.
 
Available For Sale
 
   
GROSS
   
GROSS
   
 
 
 
AMORTIZED
   
UNREALIZED
   
UNREALIZED
   
FAIR
 
At June 30, 2014
 
COST
   
GAINS
   
(LOSSES)
   
VALUE
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
 
Trust preferred and corporate securities
 
$
55,906
   
$
178
   
$
(2,846
)
 
$
53,238
 
Small business administration securities
   
52,553
     
614
     
(57
)
   
53,110
 
Non-bank qualified obligations of states and political subdivisions
   
330,629
     
1,540
     
(6,321
)
   
325,848
 
Mortgage-backed securities
   
608,263
     
5,996
     
(10,847
)
   
603,412
 
Total debt securities
   
1,047,351
     
8,328
     
(20,071
)
   
1,035,608
 
Common equities and mutual funds
   
542
     
286
     
(7
)
   
821
 
Total available for sale securities
 
$
1,047,893
   
$
8,614
   
$
(20,078
)
 
$
1,036,429
 

 
 
   
GROSS
   
GROSS
   
 
 
 
AMORTIZED
   
UNREALIZED
   
UNREALIZED
   
FAIR
 
At September 30, 2013
 
COST
   
GAINS
   
(LOSSES)
   
VALUE
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
 
Trust preferred and corporate securities
 
$
52,897
   
$
136
   
$
(4,249
)
 
$
48,784
 
Small business administration securities
   
10,099
     
482
     
-
     
10,581
 
Obligations of states and political subdivisions
   
1,880
     
-
     
(153
)
   
1,727
 
Non-bank qualified obligations of states and political subdivisions
   
255,189
     
-
     
(16,460
)
   
238,729
 
Mortgage-backed securities
   
596,343
     
3,968
     
(18,939
)
   
581,372
 
Total available for sale securities
 
$
916,408
   
$
4,586
   
$
(39,801
)
 
$
881,193
 

Held to Maturity
 
   
GROSS
   
GROSS
   
 
 
 
AMORTIZED
   
UNREALIZED
   
UNREALIZED
   
FAIR
 
At June 30, 2014
 
COST
   
GAINS
   
(LOSSES)
   
VALUE
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
 
Obligations of states and political subdivisions
   
19,321
     
43
     
(504
)
   
18,860
 
Non-bank qualified obligations of states and political subdivisions
   
189,826
     
577
     
(4,212
)
   
186,191
 
Mortgage-backed securities
   
72,102
     
-
     
(1,848
)
   
70,254
 
Total held to maturity securities
 
$
281,249
   
$
620
   
$
(6,564
)
 
$
275,305
 

 
 
   
GROSS
   
GROSS
   
 
 
 
AMORTIZED
   
UNREALIZED
   
UNREALIZED
   
FAIR
 
At September 30, 2013
 
COST
   
GAINS
   
(LOSSES)
   
VALUE
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
 
Agency and instrumentality securities
 
$
10,003
   
$
-
   
$
(390
)
 
$
9,613
 
Obligations of states and political subdivisions
   
19,549
     
13
     
(1,220
)
   
18,342
 
Non-bank qualified obligations of states and political subdivisions
   
181,547
     
-
     
(12,085
)
   
169,462
 
Mortgage-backed securities
   
76,927
     
-
     
(3,826
)
   
73,101
 
Total held to maturity securities
 
$
288,026
   
$
13
   
$
(17,521
)
 
$
270,518
 

Included in securities available for sale are trust preferred securities as follows:
 
At June 30, 2014
 
   
   
   
   
 
 
 
Amortized
   
   
Unrealized
   
S&P
 
Moody's
 
Issuer(1)
 
Cost
   
Fair Value
   
Gain (Loss)
   
Credit Rating
   
Credit Rating
 
 
 
(Dollars in Thousands)
           
 
 
 
   
   
           
 
Key Corp. Capital I
 
$
4,985
   
$
4,250
   
$
(735
)
 
BBB-
   
Baa3
 
Huntington Capital Trust II SE
   
4,977
     
4,175
     
(802
)
 
BB+
   
Baa3
 
PNC Capital Trust
   
4,961
     
4,300
     
(661
)
 
BBB
   
Baa2
 
Wells Fargo (Corestates Capital) Trust
   
4,432
     
4,300
     
(132
)
 
A-
   
A3
 
Total
 
$
19,355
   
$
17,025
   
$
(2,330
)
               


 
(1) Trust preferred securities are single-issuance.  There are no known deferrals, defaults or excess subordination.

At September 30, 2013
 
   
   
   
   
 
 
 
Amortized
   
   
Unrealized
    S&P  
Moody's
 
Issuer(1)
 
Cost
   
Fair Value
   
Gain (Loss)
   
Credit Rating
   
Credit Rating
 
 
 
(Dollars in Thousands)
           
 
 
 
   
   
           
 
Key Corp. Capital I
 
$
4,984
   
$
4,100
   
$
(884
)
 
BBB-
   
Baa3
 
Huntington Capital Trust II SE
   
4,976
     
4,075
     
(901
)
 
BB+
   
Baa3
 
PNC Capital Trust
   
4,959
     
4,175
     
(784
)
 
BBB
   
Baa2
 
Wells Fargo (Corestates Capital) Trust
   
4,399
     
4,050
     
(349
)
  A-    
A3
 
Total
 
$
19,318
   
$
16,400
   
$
(2,918
)
               


 
(1) Trust preferred securities are single-issuance.  There are no known deferrals, defaults or excess subordination.
 
Management has controls and processes in place to identify securities that could potentially have a credit impairment that is other-than-temporary.  These controls and processes can include but are not limited to 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, interest or dividend payment status, 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 financial condition of the issuers listed, and whether there have been any payment deferrals or defaults to-date.  Such factors are subject to change over time.
 
Management also determines whether the Company intends to sell a security or whether 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.

Generally accepted accounting principles require that, at acquisition, an enterprise classify debt securities into one of three categories: Available for sale (“AFS”), Held to Maturity (“HTM”) or trading. AFS securities are carried at fair value on the consolidated statements of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment. Meta Financial has no trading securities.
 
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at June 30, 2014 and September 30, 2013, are as follows:
 
Available For Sale
 
LESS THAN 12 MONTHS
   
OVER 12 MONTHS
   
TOTAL
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
At June 30, 2014
 
Value
   
(Losses)
   
Value
   
(Losses)
   
Value
   
(Losses)
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
   
   
 
Trust preferred and corporate securities
 
$
-
   
$
-
   
$
38,081
   
$
(2,846
)
 
$
38,081
   
$
(2,846
)
Small Business Administration securities
   
8,539
     
(57
)
   
-
     
-
     
8,539
     
(57
)
Non-bank qualified obligations of states and political subdivisions
   
5,826
     
(26
)
   
228,375
     
(6,295
)
   
234,201
     
(6,321
)
Mortgage-backed securities
   
78,245
     
(556
)
   
270,405
     
(10,291
)
   
348,650
     
(10,847
)
Total debt securities
   
92,610
     
(639
)
   
536,861
     
(19,432
)
   
629,471
     
(20,071
)
Common equities and mutual funds
   
124
     
(7
)
   
-
     
-
     
124
     
(7
)
Total available for sale securities
 
$
92,734
   
$
(646
)
 
$
536,861
   
$
(19,432
)
 
$
629,595
   
$
(20,078
)

 
 
LESS THAN 12 MONTHS
   
OVER 12 MONTHS
   
TOTAL
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
At September 30, 2013
 
Value
   
(Losses)
   
Value
   
(Losses)
   
Value
   
(Losses)
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
   
   
 
Trust preferred and corporate securities
 
$
29,312
   
$
(1,433
)
 
$
13,477
   
$
(2,816
)
 
$
42,789
   
$
(4,249
)
Obligations of states and political subdivisions
   
1,727
     
(153
)
   
-
     
-
     
1,727
     
(153
)
Non-bank qualified obligations of states and political subdivisions
   
238,729
     
(16,460
)
   
-
     
-
     
238,729
     
(16,460
)
Mortgage-backed securities
   
357,850
     
(18,939
)
   
-
     
-
     
357,850
     
(18,939
)
Total available for sale securities
 
$
627,618
   
$
(36,985
)
 
$
13,477
   
$
(2,816
)
 
$
641,095
   
$
(39,801
)

Held To Maturity
 
LESS THAN 12 MONTHS
   
OVER 12 MONTHS
   
TOTAL
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
At June 30, 2014
 
Value
   
(Losses)
   
Value
   
(Losses)
   
Value
   
(Losses)
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
   
   
 
Obligations of states and political subdivisions
   
6,534
     
(134
)
   
9,096
     
(370
)
   
15,630
     
(504
)
Non-bank qualified obligations of states and political subdivisions
   
8,393
     
(133
)
   
162,244
     
(4,079
)
   
170,637
     
(4,212
)
Mortgage-backed securities
   
-
     
-
     
70,254
     
(1,848
)
   
70,254
     
(1,848
)
Total held to maturity securities
 
$
14,927
   
$
(267
)
 
$
241,594
   
$
(6,297
)
 
$
256,521
   
$
(6,564
)

 
 
LESS THAN 12 MONTHS
   
OVER 12 MONTHS
   
TOTAL
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
At September 30, 2013
 
Value
   
(Losses)
   
Value
   
(Losses)
   
Value
   
(Losses)
 
 
 
(Dollars in Thousands)
 
Debt securities
 
   
   
   
   
   
 
Agency and instrumentality securities
 
$
9,613
   
$
(390
)
   
-
     
-
     
9,613
     
(390
)
Obligations of states and political subdivisions
   
17,253
     
(1,220
)
   
-
     
-
     
17,253
     
(1,220
)
Non-bank qualified obligations of states and political subdivisions
   
169,462
     
(12,085
)
   
-
     
-
     
169,462
     
(12,085
)
Mortgage-backed securities
   
73,101
     
(3,826
)
   
-
     
-
     
73,101
     
(3,826
)
Total held to maturity securities
 
$
269,429
   
$
(17,521
)
 
$
-
   
$
-
   
$
269,429
   
$
(17,521
)

At June 30, 2014, 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, and 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, no other-than-temporary impairment was recorded at June 30, 2014.

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.  The expected maturities of certain Small Business Administration securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
 
Available For Sale
 
AMORTIZED
   
FAIR
 
 
 
COST
   
VALUE
 
June 30, 2014
 
(Dollars in Thousands)
 
 
 
   
 
Due in one year or less
 
$
-
   
$
-
 
Due after one year through five years
   
11,184
     
11,375
 
Due after five years through ten years
   
260,022
     
258,608
 
Due after ten years
   
167,882
     
162,213
 
 
   
439,088
     
432,196
 
Mortgage-backed securities
   
608,263
     
603,412
 
Common equities and mutual funds
   
542
     
821
 
Total available for sale securities
 
$
1,047,893
   
$
1,036,429
 
 
 
AMORTIZED
   
FAIR
 
 
 
COST
   
VALUE
 
September 30, 2013
 
(Dollars in Thousands)
 
 
 
   
 
Due in one year or less
 
$
-
   
$
-
 
Due after one year through five years
   
9,929
     
10,061
 
Due after five years through ten years
   
162,203
     
155,014
 
Due after ten years
   
147,933
     
134,746
 
 
   
320,065
     
299,821
 
Mortgage-backed securities
   
596,343
     
581,372
 
Total available for sale securities
 
$
916,408
   
$
881,193
 

Held To Maturity
 
AMORTIZED
   
FAIR
 
 
 
COST
   
VALUE
 
June 30, 2014
 
(Dollars in Thousands)
 
 
 
   
 
Due in one year or less
 
$
349
   
$
350
 
Due after one year through five years
   
4,008
     
3,989
 
Due after five years through ten years
   
81,125
     
79,237
 
Due after ten years
   
123,665
     
121,475
 
 
   
209,147
     
205,051
 
Mortgage-backed securities
   
72,102
     
70,254
 
Total held to maturity securities
 
$
281,249
   
$
275,305
 

 
 
AMORTIZED
   
FAIR
 
 
 
COST
   
VALUE
 
September 30, 2013
 
(Dollars in Thousands)
 
 
 
   
 
Due in one year or less
 
$
649
   
$
649
 
Due after one year through five years
   
2,234
     
2,203
 
Due after five years through ten years
   
50,547
     
47,519
 
Due after ten years
   
157,669
     
147,046
 
 
   
211,099
     
197,417
 
Mortgage-backed securities
   
76,927
     
73,101
 
Total held to maturity securities
 
$
288,026
   
$
270,518
 
 
NOTE 6. 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 June 30, 2014 and September 30, 2013, unfunded loan commitments approximated $95.5 million and $102.9 million respectively, excluding undisbursed portions of loans in process.  These unfunded loan commitments 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 Company had $3.5 million and $0.5 million of commitments to purchase securities at June 30, 2014 and September 30, 2013, respectively.
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.
 
Legal Proceedings
 
The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank, BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County, Texas. The Plaintiff’s Second Amended Original Petition and Application for Temporary Restraining Order and Temporary Injunction adds both MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager and processor for both INB and MetaBank. According to the Petition, NetSpend has informed Inter National Bank (“INB”) that the depository accounts at INB for the NetSpend program supposedly contained $10.5 million less than they should. INB alleges that NetSpend has breached its fiduciary duty by making affirmative misrepresentations to INB about the safety and stability of the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing procedures. To the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have been unjustly enriched. The Bank is vigorously contesting this matter.  In January 2014, NetSpend was granted summary judgment in this matter which is under appeal.  Because the theory of liability against both NetSpend and the Bank is the same, the Bank views the NetSpend summary judgment as a positive in support of our position.  An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.
 
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 reasonably possible loss is approximately $0 to $0.3 million.
 
Other than the matters set forth above, there are no other new material pending legal proceedings or updates to which the Company or its subsidiaries is a party other than ordinary litigation routine to their respective businesses.
 
NOTE 7. STOCK OPTION PLAN
 
The Company maintains the 2002 Omnibus Incentive Plan, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company.  Awards are granted by the Stock Option Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.
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.
 
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 for the nine months ended June 30, 2014:
 
 
 
   
   
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, 2013
   
318,648
   
$
24.44
     
4.18
   
$
4,376
 
Granted
   
-
     
-
             
-
 
Exercised
   
(81,882
)
   
22.31
             
1,360
 
Forfeited or expired
   
-
     
-
             
-
 
Options outstanding, June 30, 2014
   
236,766
   
$
25.18
     
4.02
   
$
3,508
 
 
                               
Options exercisable, June 30, 2014
   
236,766
   
$
25.18
     
4.02
   
$
3,508
 

 
 
   
Weighted
 
 
 
   
Average
 
   
 
Number of
   
Fair Value
 
  
 
Shares
   
at Grant
 
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
   
 
Nonvested shares outstanding, September 30, 2013
   
4,000
   
$
25.67
 
Granted
   
4,150
     
37.85
 
Vested
   
(4,150
)
   
35.02
 
Forfeited or expired
   
-
     
-
 
Nonvested shares outstanding, June 30, 2014
   
4,000
   
$
28.61
 

At June 30, 2014, stock based compensation expense not yet recognized in income totaled $68,000, which is expected to be recognized over a weighted average remaining period of 2.03 years.

NOTE 8. SEGMENT INFORMATION
 
An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met. The Company has determined that it has two reportable segments. The first reportable segment, Retail Banking, a division of 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 its offices are located. The second reportable segment, MPS, is also 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 Automated Teller Machines (“ATMs”) into the debit networks, credit programs, Automated Clearing House (“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 inter-segment eliminations.
Transactions between affiliates, the resulting revenues of which are shown in the intersegment revenue category, are conducted at market prices, meaning prices that would be paid if the companies were not affiliates.
 
The following tables present segment data for the Company for the three and nine months ended June 30, 2014 and 2013, respectively.
 
 
 
Retail
   
Meta Payment
   
   
 
 
 
Banking
   
Systems®
   
All Others
   
Total
 
 
 
   
   
   
 
Three Months Ended June 30, 2014
 
   
   
   
 
Interest income
 
$
8,223
   
$
4,343
   
$
-
   
$
12,566
 
Interest expense
   
499
     
27
     
112
     
638
 
Net interest income (expense)
   
7,724
     
4,316
     
(112
)
   
11,928
 
Provision (recovery) for loan losses
   
300
     
-
     
-
     
300
 
Non-interest income
   
732
     
11,749
     
-
     
12,481
 
Non-interest expense
   
4,852
     
13,904
     
81
     
18,837
 
Income (loss) before income tax expense (benefit)
   
3,304
     
2,161
     
(193
)
   
5,272
 
Income tax expense (benefit)
   
653
     
495
     
(80
)
   
1,068
 
Net income (loss)
 
$
2,651
   
$
1,666
   
$
(113
)
 
$
4,204
 
 
                               
Inter-segment revenue (expense)
 
$
2,976
     
(2,976
)
 
$
-
   
$
-
 
Total assets
   
678,116
     
1,241,967
     
3,250
     
1,923,333
 
Total deposits
   
254,215
     
1,098,262
     
(6,418
)
   
1,346,059
 

 
 
Retail
   
Meta Payment
   
   
 
 
 
Banking
   
Systems®
   
All Others
   
Total
 
 
 
   
   
   
 
Nine Months Ended June 30, 2014
 
   
   
   
 
Interest income
 
$
23,481
   
$
12,309
   
$
-
   
$
35,790
 
Interest expense
   
1,410
     
84
     
337
     
1,831
 
Net interest income (expense)
   
22,071
     
12,225
     
(337
)
   
33,959
 
Provision (recovery) for loan losses
   
600
     
-
     
-
     
600
 
Non-interest income
   
2,540
     
36,591
     
-
     
39,131
 
Non-interest expense
   
15,306
     
41,619
     
716
     
57,641
 
Income (loss) before income tax expense (benefit)
   
8,705
     
7,197
     
(1,053
)
   
14,849
 
Income tax expense (benefit)
   
1,489
     
1,400
     
(389
)
   
2,500
 
Net income (loss)
 
$
7,216
   
$
5,797
   
$
(664
)
 
$
12,349
 
 
                               
Inter-segment revenue (expense)
 
$
9,602
   
$
(9,602
)
 
$
-
   
$
-
 
Total assets
   
678,116
     
1,241,967
     
3,250
     
1,923,333
 
Total deposits
   
254,215
     
1,098,262
     
(6,418
)
   
1,346,059
 

 
                                 
  
Retail Banking
   
Meta Payment Systems®
   
All Others
   
Total
 
 
 
   
   
   
 
Three Months Ended June 30, 2013
 
   
   
   
 
Interest income
 
$
6,112
   
$
3,713
   
$
-
   
$
9,825
 
Interest expense
   
521
     
30
     
115
     
666
 
Net interest income (expense)
   
5,591
     
3,683
     
(115
)
   
9,159
 
Provision (recovery) for loan losses
   
-
     
-
     
-
     
-
 
Non-interest income
   
1,262
     
12,297
     
-
     
13,559
 
Non-interest expense
   
4,415
     
13,359
     
250
     
18,024
 
Income (loss) before tax
   
2,438
     
2,621
     
(365
)
   
4,694
 
Income tax expense (benefit)
   
519
     
636
     
(133
)
   
1,022
 
Net income (loss)
 
$
1,919
   
$
1,985
   
$
(232
)
 
$
3,672
 
 
                               
Inter-segment revenue (expense)
 
$
2,981
   
$
(2,981
)
 
$
-
   
$
-
 
Total assets
   
340,517
     
1,316,786
     
2,635
     
1,659,938
 
Total deposits
   
236,724
     
1,179,856
     
(703
)
   
1,415,877
 

                              
 
Retail Banking
   
Meta Payment Systems®
   
All Others
   
Total
 
 
 
   
   
   
 
Nine Months Ended June 30, 2013
 
   
   
   
 
Interest income
 
$
18,130
   
$
11,043
   
$
-
   
$
29,173
 
Interest expense
   
1,860
     
98
     
354
     
2,312
 
Net interest income (expense)
   
16,270
     
10,945
     
(354
)
   
26,861
 
Provision (recovery) for loan losses
   
(300
)
   
-
     
-
     
(300
)
Non-interest income
   
4,362
     
37,702
     
-
     
42,064
 
Non-interest expense
   
14,782
     
41,118
     
787
     
56,687
 
Income (loss) before tax
   
6,150
     
7,529
     
(1,141
)
   
12,538
 
Income tax expense (benefit)
   
1,367
     
1,649
     
(422
)
   
2,594
 
Net income (loss)
 
$
4,783
   
$
5,880
   
$
(719
)
 
$
9,944
 
 
                               
Inter-segment revenue (expense)
 
$
8,899
   
$
(8,899
)
 
$
-
   
$
-
 
Total assets
   
340,517
     
1,316,786
     
2,635
     
1,659,938
 
Total deposits
   
236,724
     
1,179,856
     
(703
)
   
1,415,877
 
The following tables present gross profit data for MPS for the three and nine months ended June 30, 2014 and 2013.

Nine Months Ended June 30,
 
2014
   
2013
 
 
 
   
 
Interest income
 
$
12,309
   
$
11,043
 
Interest expense
   
84
     
98
 
Net interest income
   
12,225
     
10,945
 
 
               
Provision (recovery) for loan losses
   
-
     
-
 
Non-interest income
   
36,591
     
37,702
 
Card processing expense
   
11,643
     
12,115
 
Gross Profit
   
37,173
     
36,532
 
 
               
Other non-interest expense
   
29,976
     
29,003
 
 
               
Income (loss) before income tax expense (benefit)
   
7,197
     
7,529
 
Income tax expense
   
1,400
     
1,649
 
Net Income
 
$
5,797
   
$
5,880
 

Three Months Ended June 30,
 
2014
   
2013
 
 
 
   
 
Interest income
 
$
4,343
   
$
3,713
 
Interest expense
   
27
     
30
 
Net interest income
   
4,316
     
3,683
 
 
               
Provision (recovery) for loan losses
   
-
     
-
 
Non-interest income
   
11,749
     
12,297
 
Card processing expense
   
3,843
     
3,472
 
Gross Profit
   
12,222
     
12,508
 
 
               
Other non-interest expense
   
10,061
     
9,887
 
 
               
Income (loss) before income tax expense (benefit)
   
2,161
     
2,621
 
Income tax expense (benefit)
   
495
     
636
 
Net Income (Loss)
 
$
1,666
   
$
1,985
 

NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures. The ASU does not change current requirements for reporting net income or other comprehensive income. The Company adopted this ASU effective October 1, 2013, and the adoption did not have a material impact on the Company's consolidated financial statements, results of operations or cash flows.
Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
 
This ASU provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward exists.  The objective of this ASU is to eliminate diversity in practice related to this topic.  The ASU states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss or a tax credit carryforward except in certain situations.  The Company adopted this ASU effective January 1, 2014, and the adoption did not have a material impact on the Company’s consolidated financial statements.
 
Accounting Standards Update No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310:40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure
 
This ASU provides guidance on when a loan should be derecognized and collateral assets recognized during an in substance repossession or foreclosure.  The objective of this ASU is to eliminate diversity in practice related to the topic.  The ASU states creditors are considered to have physical possession of residential real estate property when either the creditor obtains title for the property or the borrower transfers all interest in the property through a deed or other legal agreement.  When physical possession occurs, the loan should be derecognized and collateral assets recognized.  This update is effective for annual and interim periods beginning after December 15, 2014, and is not expected to have a material impact on the Company’s consolidated financial statements.
 
Accounting Standards Update No. 2014-09, Revenue Recognition – Revenue from Contracts with Customers (Topic 606)
 
This ASU provides guidance on when to recognize revenue from contracts with customers.  The objective of this ASU is to eliminate diversity in practice related to this topic and to develop guidance that would streamline and enhance revenue recognition requirements.  The ASU defines five steps to recognize revenue including, identify the contract with a customer, identify the performance obligations in the contract, determine a transaction price, allocate the transaction price to the performance obligations and then recognize the revenue when or as the entity satisfies a performance obligation.  This update is effective for annual and interim periods beginning after December 15, 2016, and the Company is currently assessing the potential impact to the consolidated financial statements.
 
NOTE 10. FAIR VALUE MEASUREMENTS
 
Accounting Standards Codification (“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 requires 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 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 and Held to Maturity.  Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost.  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, instrumentality, 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 June 30, 2014 or September 30, 2013.  Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds, corporate debt securities and trust preferred securities.
 
The fair values of securities 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 considers these valuations supplied by a third party provider which utilizes several sources for valuing fixed-income securities.  These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology, and the third party provider’s own matrix and desk pricing. The Company continually reviews the third party’s methods and sources methodology for reasonableness. Sources utilized by the third party provider include but are not limited to pricing models that vary based by asset class and include available trade, bid, and other market information.  This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. No less than quarterly, the Company receives and compares prices provided by multiple securities dealers to validate the accuracy and reasonableness of prices received from the third party provider. Each security held is priced by a minimum of two independent pricing sources.  On a monthly basis, the Investment Committee and the Director of Portfolio Management reviews mark-to-market changes in the securities portfolio for reasonableness.
 
The following table summarizes the fair values of securities available for sale and held to maturity at June 30, 2014 and September 30, 2013.  Securities available for sale are measured at fair value on a recurring basis, while securities held to maturity are carried at amortized cost in the consolidated statements of financial condition.
 
 
 
Fair Value at June 30, 2014
 
  
 
Available For Sale
   
Held to Maturity
 
(Dollars in Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Debt securities
 
   
   
   
   
   
   
   
 
Trust preferred and corporate securities
 
$
53,238
   
$
-
   
$
53,238
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Small business administration securities
   
53,110
     
-
     
53,110
     
-
     
-
     
-
     
-
     
-
 
Obligations of states and political subdivisions
   
-
     
-
     
-
     
-
     
18,860
     
-
     
18,860
     
-
 
Non-bank qualified obligations of states and political subdivisions
   
325,848
     
-
     
325,848
     
-
     
186,191
     
-
     
186,191
     
-
 
Mortgage-backed securities
   
603,412
     
-
     
603,412
     
-
     
70,254
     
-
     
70,254
     
-
 
Total debt securities
   
1,035,608
     
-
     
1,035,608
     
-
     
275,305
     
-
     
275,305
     
-
 
Common equities and mutual funds
   
821
     
821
     
-
     
-
     
-
     
-
     
-
     
-
 
Total securities
 
$
1,036,429
   
$
821
   
$
1,035,608
   
$
-
   
$
275,305
   
$
-
   
$
275,305
   
$
-
 

 
 
Fair Value at September 30, 2013
 
 
 
Available For Sale
   
Held to Maturity
 
(Dollars in Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Debt securities
 
   
   
   
   
   
   
   
 
Trust preferred and corporate securities
 
$
48,784
   
$
-
   
$
48,784
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Agency and instrumentality securities
   
-
     
-
     
-
     
-
     
9,613
     
-
     
9,613
     
-
 
Small business administration securities
   
10,581
     
-
     
10,581
     
-
     
-
     
-
     
-
     
-
 
Obligations of states and political subdivisions
   
1,727
     
-
     
1,727
     
-
     
18,342
     
-
     
18,342
     
-
 
Non-bank qualified obligations of states and political subdivisions
   
238,729
     
-
     
238,729
     
-
     
169,462
     
-
     
169,462
     
-
 
Mortgage-backed securities
   
581,372
     
-
     
581,372
     
-
     
73,101
     
-
     
73,101
     
-
 
Total securities
 
$
881,193
   
$
-
   
$
881,193
   
$
-
   
$
270,518
   
$
-
   
$
270,518
   
$
-
 

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 June 30, 2014 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.
 
The following table summarizes the assets of the Company that are measured at fair value in the consolidated statements of financial condition on a non-recurring basis as of June 30, 2014 and September 30, 2013.
 
 
Fair Value at June 30, 2014
 
(Dollars in Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Impaired Loans, net
 
   
   
   
 
One to four family residential mortgage loans
 
$
-
   
$
-
   
$
-
   
$
-
 
Commercial and multi-family real estate loans
   
929
     
-
     
-
     
929
 
Total Impaired Loans
   
929
     
-
     
-
     
929
 
Foreclosed Assets, net
   
116
     
-
     
-
     
116
 
Total
 
$
1,045
   
$
-
   
$
-
   
$
1,045
 

 
Fair Value at September 30, 2013
 
(Dollars in Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Impaired Loans, net
 
   
   
   
 
One to four family residential mortgage loans
 
$
257
   
$
-
   
$
-
   
$
257
 
Commercial and multi-family real estate loans
   
1,810
     
-
     
-
     
1,810
 
Total Impaired Loans
   
2,067
     
-
     
-
     
2,067
 
Foreclosed Assets, net
   
116
     
-
     
-
     
116
 
Total
 
$
2,183
   
$
-
   
$
-
   
$
2,183
 

   
 
Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)
 
Fair Value at June 30, 2014
 
Valuation Technique
Unobservable Input
 
 
 
 
    
Impaired Loans, net
 
$
929
 
Market approach
Appraised values (1)
Foreclosed Assets, net
   
116
 
Market approach
Appraised values (1)
 
(1)
The Company generally relies on external appraisers to develop this information.  Management reduced the appraised value by estimated selling costs in a range of 4% to 10%.

   
 
Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)
 
Fair Value at September 30, 2013
 
Valuation Technique
Unobservable Input
 
 
 
 
    
Impaired Loans, net
 
$
2,067
 
Market approach
Appraised values (1)
Foreclosed Assets, net
   
116
 
Market approach
Appraised values (1)

(1)
The Company generally relies on external appraisers to develop this information.  Management reduced the appraised value by estimated selling costs in a range of 4% to 10%.

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 June 30, 2014 and September 30, 2013, as more fully described below.  The operations of the Company are managed from a going concern basis and not a liquidation basis.  As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations.  Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value.  Neither of these components have been given consideration in the presentation of fair values below.
 
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at June 30, 2014 and September 30, 2013.
 
 
June 30, 2014
 
 
 
Carrying
   
Estimated
   
   
   
 
 
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
 
 
(Dollars in Thousands)
 
Financial assets
 
   
   
   
   
 
Cash and cash equivalents
 
$
30,861
   
$
30,861
   
$
30,861
   
$
-
   
$
-
 
 
                                       
Securities available for sale
   
1,036,429
     
1,036,429
     
821
     
1,035,608
     
-
 
Securities held to maturity
   
281,249
     
275,305
     
-
     
275,305
     
-
 
Total securities
   
1,317,678
     
1,311,734
     
821
     
1,310,913
     
-
 
 
                                       
Loans receivable:
                                       
One to four family residential mortgage loans
   
108,713
     
103,057
     
-
     
-
     
103,057
 
Commercial and multi-family real estate loans
   
216,904
     
222,942
     
-
     
-
     
222,942
 
Agricultural real estate loans
   
56,945
     
55,072
     
-
     
-
     
55,072
 
Consumer loans
   
29,379
     
29,114
     
-
     
-
     
29,114
 
Commercial operating loans
   
26,683
     
21,301
     
-
     
-
     
21,301
 
Agricultural operating loans
   
38,958
     
40,424
     
-
     
-
     
40,424
 
Total loans receivable
   
477,582
     
471,910
     
-
     
-
     
471,910
 
 
                                       
Federal Home Loan Bank stock
   
16,845
     
16,845
     
-
     
16,845
     
-
 
Accrued interest receivable
   
10,868
     
10,868
     
10,868
     
-
     
-
 
 
                                       
Financial liabilities
                                       
Noninterest bearing demand deposits
   
1,123,013
     
1,123,013
     
1,123,013
     
-
     
-
 
Interest bearing demand deposits, savings, and money markets
   
105,965
     
105,965
     
105,965
     
-
     
-
 
Certificates of deposit
   
117,081
     
117,449
     
-
     
117,449
     
-
 
Total deposits
   
1,346,059
     
1,346,427
     
1,228,978
     
117,449
     
-
 
 
                                       
Advances from Federal Home Loan Bank
   
7,000
     
8,988
     
-
     
8,988
     
-
 
Federal funds purchased
   
360,000
     
360,000
             
360,000
         
Securities sold under agreements to repurchase
   
8,478
     
8,478
     
-
     
8,478
     
-
 
Subordinated debentures
   
10,310
     
10,264
     
-
     
10,264
     
-
 
Accrued interest payable
   
299
     
299
     
299
     
-
     
-
 

 
 
September 30, 2013
 
 
 
Carrying
   
Estimated
   
   
   
 
 
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
 
 
(Dollars in Thousands)
 
Financial assets
 
   
   
   
   
 
Cash and cash equivalents
 
$
40,063
   
$
40,063
   
$
40,063
   
$
-
   
$
-
 
 
                                       
Securities available for sale
   
881,193
     
881,193
     
-
     
881,193
     
-
 
Securities held to maturity
   
288,026
     
270,518
     
-
     
270,518
     
-
 
Total securities
   
1,169,219
     
1,151,711
     
-
     
1,151,711
     
-
 
 
                                       
Loans receivable:
                                       
One to four family residential mortgage loans
   
82,287
     
72,628
     
-
     
-
     
72,628
 
Commercial and multi-family real estate loans
   
192,786
     
200,778
     
-
     
-
     
200,778
 
Agricultural real estate loans
   
29,552
     
30,920
     
-
     
-
     
30,920
 
Consumer loans
   
30,314
     
30,588
     
-
     
-
     
30,588
 
Commercial operating loans
   
16,264
     
15,718
     
-
     
-
     
15,718
 
Agricultural operating loans
   
33,750
     
35,175
     
-
     
-
     
35,175
 
Total loans receivable
   
384,953
     
385,807
     
-
     
-
     
385,807
 
 
                                       
Federal Home Loan Bank stock
   
9,994
     
9,994
     
-
     
9,994
     
-
 
Accrued interest receivable
   
8,582
     
8,582
     
8,582
     
-
     
-
 
 
                                       
Financial liabilities
                                       
Noninterest bearing demand deposits
   
1,086,258
     
1,086,258
     
1,086,258
     
-
     
-
 
Interest bearing demand deposits, savings, and money markets
   
97,426
     
97,426
     
97,426
     
-
     
-
 
Certificates of deposit
   
131,599
     
132,187
     
-
     
132,187
     
-
 
Total deposits
   
1,315,283
     
1,315,871
     
1,183,684
     
132,187
     
-
 
 
                                       
Advances from Federal Home Loan Bank
   
7,000
     
9,089
     
-
     
9,089
     
-
 
Federal funds purchased
   
190,000
     
190,000
             
190,000
         
Securities sold under agreements to repurchase
   
9,146
     
9,146
     
-
     
9,146
     
-
 
Subordinated debentures
   
10,310
     
10,312
     
-
     
10,312
     
-
 
Accrued interest payable
   
291
     
291
     
291
     
-
     
-
 

The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at June 30, 2014 and September 30, 2013.
 
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
 
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost.  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
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 and for similar remaining maturities.  When using the discounting method to determine fair value, loans were grouped by homogeneous loans with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers at June 30, 2014 and September 30, 2013.  In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value as a result of the discounted cash flow which approximates the fair value adjustment for the credit quality component.
 
FEDERAL HOME LOAN BANK (“FHLB”) STOCK
The fair value of such stock is assumed to approximate book value since the Company is only 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 for advances with similar terms and remaining maturities.
 
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
 
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 over the contractual maturity of such borrowings.
 
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
 
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.
NOTE 11. INTANGIBLE ASSETS
 
The changes in the carrying amount of the Company’s intangible assets for the nine months ended June 30, 2014 and 2013 are as follows:
 
 
 
Meta Payment
   
Meta Payment
   
 
 
 
Systems®
   
Systems®
   
 
 
 
Patents
   
Other
   
Total
 
 
 
(Dollars in Thousands)
 
 
 
   
   
 
Balance as of September 30, 2013
 
$
2,339
   
$
-
   
$
2,339
 
 
                       
Patent costs capitalized during the period
   
202
     
-
     
202
 
 
                       
Amortization during the period
   
(56
)
   
-
     
(56
)
 
                       
Balance as of June 30, 2014
 
$
2,485
   
$
-
   
$
2,485
 

 
 
Meta Payment
   
Meta Payment
   
 
 
 
Systems®
   
Systems®
   
 
 
 
Patents
   
Other
   
Total
 
 
 
(Dollars in Thousands)
 
 
 
   
   
 
Balance as of September 30, 2012
 
$
2,026
   
$
9
   
$
2,035
 
 
                       
Acquisitions during the period
   
344
     
-
     
344
 
 
                       
Amortization during the period
   
(33
)
   
(9
)
   
(42
)
 
                       
Balance as of June 30, 2013
 
$
2,337
   
$
-
   
$
2,337
 

The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment.  There was no impairment to intangible assets during the nine months ended June 30, 2014 and 2013.
 
NOTE 12. REGULATORY MATTERS AND SETTLEMENT OF OTS ENFORCEMENT ACTIONS
 
As previously disclosed in our Annual Report on Form 10-K, on July 15, 2011, the Company and the Bank each stipulated and consented to a Cease and Desist Order (the “Consent Orders”) issued by the Office of Thrift Supervision (the “OTS”). Since the issuance of the supervisory directives and the Consent Orders, the Company and the Bank have been continuing to cooperate with the OTS, and, as of July 21, 2011, its successors, the Federal Reserve and the OCC, to correct those aspects of its operations that were addressed in the Consent Orders. Satisfaction of the requirements of the Consent Orders is subject to the ongoing review and supervision of the OCC with respect to the Bank and the Federal Reserve with respect to the Company. The Bank and the Company have and expect to continue to expend significant management and financial resources to address areas that were cited in the Consent Orders.
While we believe that the Company and the Bank have made significant progress in complying with the orders, there can be no assurance that our regulators will ultimately determine that we have met all of the requirements of the Consent Orders to their satisfaction. If our regulators believe that we have not made sufficient progress in complying with the Consent Orders, they could seek to impose additional regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties. If any of these measures is imposed in the future, it could have a material adverse effect on our financial condition and results of operations and on our ability to raise additional capital.
 
NOTE 13. SUBSEQUENT EVENTS
 
Management has evaluated subsequent events.  There were no material subsequent events that would require recognition or disclosure in our consolidated financial statements as of and for the three and nine months ended June 30, 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
META FINANCIAL GROUP, INC®.
AND SUBSIDIARIES
 
FORWARD LOOKING STATEMENTS
 
Meta Financial Group, Inc.®, (“Meta Financial” or “the Company” or “us”) and its wholly-owned subsidiary, MetaBank™ (the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements contained in its filings with the Securities and Exchange Commission (“SEC”), in its reports to stockholders, and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
 
You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future” or the negative of those terms or other words of similar meaning. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements include statements with respect to the Company’s beliefs, expectations, estimates, and intentions that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such statements address, among others, the following subjects: future operating results; customer retention; loan and other product demand; important components of the Company’s balance sheet and income statements; growth and expansion; new products and services, such as those offered by the Bank or Meta Payment Systems® (“MPS”), a division of the Bank; credit quality and adequacy of reserves; technology; and the Company’s employees. The following factors, among others, could cause the Company’s financial performance to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), as well as efforts of the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, market, and monetary fluctuations; the timely development of and acceptance of new products and services offered by the Company as well as risks (including reputational and litigation) attendant thereto and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third parties; the scope of restrictions and compliance requirements imposed by the supervisory directives and/or the Consent Orders entered into by the Company and the Bank with the Office of Thrift Supervision (the functions of which were transferred to the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve) and any other such regulatory actions which may be initiated; the impact of changes in financial services’ laws and regulations, including but not limited to our relationship with our regulators, the OCC and the Federal Reserve; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk in general, including, but not limited to, those risks involving the MPS division; the growth of the Company’s business, as well as expenses related thereto; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default.
 
The foregoing list of factors is not exclusive. Additional discussions of factors affecting the Company’s business and prospects are contained in the Company’s periodic filings with the SEC.  We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  The Company expressly disclaims any intent or obligation to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries.
GENERAL
 
The Company, a registered unitary savings and loan holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank.  Unless the context otherwise requires, references herein to the Company include Meta Financial and the Bank, and all subsidiaries of Meta Financial, direct or indirect, on a consolidated basis.
 
The Company’s stock trades on the NASDAQ Global Market under the symbol “CASH.”
 
The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries at June 30, 2014, compared to September 30, 2013, and the consolidated results of operations for the three and nine months ended June 30, 2014 and 2013.  This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2013.
 
OVERVIEW OF CORPORATE DEVELOPMENTS
 
Retail Bank fiscal 2014 third quarter net income was $2.7 million compared to net income of $1.9 million in the fiscal 2013 third quarter.  The increase was primarily due to an increase of $2.1 million in interest income offset by an increase of $0.3 million in provision for loan losses, a decrease of $0.5 million in non-interest income, and an increase of $0.5 million in non-interest expense.  Retail Bank checking balances continued to grow from $62.3 million at June 30, 2013 to $76.3 million, or 22.4%, at June 30, 2014.
 
MPS fiscal 2014 third quarter net income was $1.7 million compared to net income of $2.0 million in the fiscal 2013 third quarter.  This decrease was primarily the result of a reduction in non-interest income of $0.5 million and an increase in non-interest expense of $0.5 million, partially offset by an increase in interest income of $0.6 million.  The average internal net interest yield MPS received for its deposits was 1.36% in the fiscal 2014 third quarter and 1.25% in the comparable 2013 period.
 
The Company’s tangible book value per common share increased by $3.99, or 17.2%, from $23.17 at September 30, 2013 to $27.16 per share at June 30, 2014 partially due to a sizable increase in fair market value of available-for-sale (“AFS”) securities, which positively affected accumulated other comprehensive income (“AOCI”).  The tangible book value per common share excluding AOCI was $28.04 as of June 30, 2014, compared to $26.51 as of September 30, 2013.
At June 30, 2014, non-performing assets were $0.7 million compared to $0.8 million at September 30, 2013.
 
FINANCIAL CONDITION
 
At June 30, 2014, the Company’s assets grew by $231.3 million, or 13.7%, to $1.9 billion compared to $1.7 billion at September 30, 2013.  The increase in assets was reflected primarily in increases in the Company’s investment securities available for sale and an increase in net loans receivable.
 
Total cash and cash equivalents were $30.9 million at June 30, 2014, a decrease of $9.2 million from $40.1 million at September 30, 2013.  The decline primarily was the result of the Company’s investing its excess liquidity in investment securities and loan receivables.  In general, the Company maintains its cash investments in interest-bearing overnight deposits with the FHLB of Des Moines and the Federal Reserve Bank of Minneapolis.  At June 30, 2014, the Company had no federal funds sold.
The total of mortgage-backed securities (“MBS”) and investment securities increased $148.5 million, or 12.7%, to $1.3 billion at June 30, 2014 as compared to $1.2 billion at September 30, 2013, as investment purchases exceeded related maturities, sales, and principal pay downs.  The Company’s portfolio of securities consists primarily of U.S. Government agency and instrumentality MBS, which have relatively short expected lives and very high quality non-bank qualified obligations of states and political subdivisions (“NBQ”) which mature in approximately 15 years or less.  Of the total of $675.5 million of MBS, $603.4 million are classified as available for sale, and $72.1 million are classified as held to maturity.  Of the total of $642.2 million of investment securities, $433.0 million are classified as available for sale and $209.2 million are classified as held to maturity.  During the nine month period ended June 30, 2014, the Company purchased a gross amount of $139.1 million of MBS with estimated future maturities of five years or less (primarily due to anticipated prepayments) and stated final maturities of 30 years or less as well as $128.6 million of investment securities available for sale and $10.7 million of investment securities held to maturity, primarily high quality NBQ obligations of states and political subdivisions and U.S. Government guaranteed Small Business Administration uncapped, floating rate securities.
 
The Company’s portfolio of net loans receivable increased $91.5 million, or 24.1%, to $471.9 million at June 30, 2014 from $380.4 million at September 30, 2013.  This increase from the prior fiscal year primarily relates to increases in agricultural real estate loans, residential real estate loans and commercial and multi-family real estate loans of $27.4, $26.4, and $24.1 million, respectively.  Other than consumer loans, which decreased, the other categories have also risen significantly over the last year.
 
Assets held for sale at June 30, 2014 decreased from September 30, 2013 by $1.1 million due to the sale of a branch in the Central Iowa market.
 
Total deposits increased $30.8 million, or 2.3%, at June 30, 2014 from September 30, 2013.  Deposits attributable to MPS increased by $34.5 million, or 3.2%, to $1.1 billion at June 30, 2014, compared to $1.1 billion at September 30, 2013.  Additionally, certificates of deposits decreased by $14.5 million to $117.1 million primarily related to a decrease in public funds on deposit as planned by the Company.  The average balance of total deposits and interest-bearing liabilities was $1.7 billion for the nine month period ended June 30, 2014 compared to $1.5 billion for the same period in the prior fiscal year.  The average balance of non-interest bearing deposits increased by $123.3 million, or 10.3% to $1.3 billion at June 30, 2014, compared to $1.2. billion for the same period in the prior fiscal year.
 
Total borrowings increased $169.3 million from $216.5 million at September 30, 2013 to $385.8 million at June 30, 2014, primarily due to the increase of federal funds purchased.  The Company’s overnight federal funds purchased fluctuates on a daily basis due to the nature of a portion of its non-interest bearing deposit base, primarily related to payroll processing timing with a higher volume of overnight federal funds purchased on Monday and Tuesday, which are typically paid down throughout the week.
 
At June 30, 2014, the Company’s stockholders’ equity totaled $169.2 million, an increase of $26.2 million from $143.0 million at September 30, 2013, partially due to an increase in AOCI stemming from the securities portfolio which significantly appreciated for the nine months ending June 30, 2014 notwithstanding the noteworthy increase in two year through seven year Treasury rates over that same time period.  At June 30, 2014, the Bank continues to exceed all regulatory requirements for classification as a well‑capitalized institution.  See “Liquidity and Capital Resources” for further information.
 
Non-performing Assets and Allowance for Loan Losses
 
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 reversed against current income.  The loan will remain on a non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance.
 
The Company believes that the level of allowance for loan losses at June 30, 2014 is appropriate and reflects probable losses related to these loans; however, there can be no assurance that all loans will be fully collectible or that the present level of the allowance will be adequate in the future.  See “Allowance for Loan Losses” below.
The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio.  Foreclosed assets include assets acquired in settlement of loans.
 
 
 
Non-Performing Assets As Of
 
 
 
June 30, 2014
   
September 30, 2013
 
Non-Performing Loans
 
(Dollars in Thousands)
 
 
 
   
 
Non-Accruing Loans:
 
   
 
1-4 Family
 
$
282
   
$
245
 
Commercial & Multi Family (1) (2)
   
313
     
427
 
Commercial Operating (2)
   
-
     
7
 
Total
   
595
     
679
 
 
               
Accruing Loans Delinquent 90 Days or More
               
Consumer
   
35
     
13
 
Total
   
35
     
13
 
 
                 
Total Non-Performing Loans
   
630
     
692
 
 
               
Other Assets
               
 
               
Foreclosed Assets:
               
Commercial & Multi Family
   
116
     
116
 
Total
   
116
     
116
 
 
                
Total Other Assets
   
116
     
116
 
 
               
Total Non-Performing Assets
 
$
746
   
$
808
 
Total as a Percentage of Total Assets
   
0.04
%
   
0.05
%


 
(1)
At June 30, 2014, the Company had $313,000 of TDRs in Commercial & Multi Family.
(2)
At September 30, 2013, the Company had $320,000 of TDRs in Commercial & Multi Family and $7,000 of TDRs in Commercial Operating.
In addition to the non-performing TDRs in (1) and (2), the Company had an additional $4.5 million and $4.9 million TDRs performing in accordance with their terms at June 30, 2014 and September 30, 2013, respectively.

At June 30, 2014, non-performing loans totaled $0.6 million, representing 0.1% of total loans, compared to $0.7 million, or 0.2% of total loans at September 30, 2013.
Classified AssetsFederal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
 
General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, who may order the establishment of additional general or specific loss allowances.
 
On the basis of management’s review of its loans and other assets, at June 30, 2014, the Company had classified a total of $15.6 million of its assets as substandard and none as doubtful or loss.  This compares to classifications at September 30, 2013 of $7.7 million as substandard and none as doubtful or loss.  See Note 2 to the Condensed Consolidated Financial Statements.
 
Allowance for Loan LossesThe allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management.  Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance.
 
Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the adequacy of its allowance for loan losses.  The economic conditions of our markets have stabilized and are improving, along with the financial conditions of some borrowers.  With stable to improving economies in our markets, management believes that future losses in the residential portfolio may be somewhat lower than historical experience.  It should be noted that a sizeable portion of the Company’s consumer loan portfolio is secured by residential real estate.  Over the past three years, loss rates in the commercial and multi-family real estate market have remained moderate.  Management believes that future losses in this portfolio may be somewhat higher than recent historical experience.  Loss rates in the agricultural real estate and agricultural operating loan portfolios have been minimal in the past three years primarily due to higher commodity prices as well as above average yields which have created positive economic conditions for most farmers in our markets.  Nonetheless, management still expects that future losses in this portfolio, which have been very low, could be higher than recent historical experience.  Management believes that various levels of wet weather conditions within our markets and low commodity prices have the potential to negatively impact potential crop proceeds which would have a negative economic effect on our agricultural markets.  Lower commodity prices than in prior years also has the potential to negatively affect some agricultural borrowers.  In addition, management believes the continuing low growth environment may also negatively impact consumers’ repayment capacities.
 
At June 30, 2014, the Company had established an allowance for loan losses totaling $4.9 million compared to $3.9 million at September 30, 2013, with the increase primarily due to substantial loan portfolio growth.  Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, the current level of the allowance for loan losses at June 30, 2014 reflects an appropriate allowance against probable losses from the loan portfolio.  Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods.
The allowance for loan losses reflects management’s best estimate of probable losses inherent in the portfolio based on currently available information.  In addition to the factors mentioned above, future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio.  In addition, our regulators have the ability to order us to increase our allowance.
 
CRITICAL ACCOUNTING ESTIMATES
 
The Company’s financial statements are prepared in accordance with U.S. GAAP.  The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.  Based on its consideration of accounting policies that:  (i) involve the most complex and subjective decisions and assessments which may be uncertain at the time the estimate was made, and (ii) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements, management has identified the policies described below as Critical Accounting Policies.  This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the year ended September 30, 2013 and information contained herein.
 
Allowance for Loan Losses.  The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date.  Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors.  Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements.  Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries.  Size and complexity of individual credits in relation to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the methodology.  Although management believes the levels of the allowance at both June 30, 2014 and September 30, 2013 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions or other factors could result in increasing losses.
 
Intangible Assets.  Each quarter the Company evaluates the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.  In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate.  If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
 
Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and internal forecasts.  Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.
 
Deferred Tax Assets.  The Company accounts for income taxes according to the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are recognized subject to management’s judgment that realization is more-likely-than-not.  An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance.
Security Impairment.  Management continually monitors the investment security portfolio for impairment on a security by security basis.  Management has controls and processes in place to identify securities that could potentially have a credit impairment that is other-than-temporary.  These controls and processes can include, but are not limited to, analyzing 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, interest or dividend payment status, 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, the Company recognizes an other-than-temporary impairment in earnings 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 its amortized cost, 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 earnings, 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 of 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.  Cash flow estimates for trust preferred securities are derived from scenario-based outcomes of forecasted default rates, loss severity, prepayment speeds and structural support.
 
Level 3 Fair Value Measurement. U.S. GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value.  Level 3 measurement includes significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  Although management believes that it uses a best estimate of information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with U.S. GAAP.
 
RESULTS OF OPERATIONS
 
General.
The Company recorded net income of $4.2 million, or 68 cents per diluted share, for the three months ended June 30, 2014 compared to net income of $3.7 million, or 66 cents per diluted share, for the same period in fiscal year 2013.  The increase in net income was primarily due to an increase of $1.8 million in MBS and other investments interest income and an increase of $1.0 million in interest income on loans receivable, offset in part by decreases in non-interest income and an increase in provision for loan losses and non-interest expense.
 
The Company recorded net income of $12.3 million, or $1.99 per diluted share, for the nine months ended June 30, 2014 compared to $9.9 million, or $1.80 per diluted share, for the same period in fiscal year 2013.  Net earnings for the nine month period ended June 30, 2014 were primarily impacted by an increase of $4.3 million in MBS and other investments  interest income an increase of $2.3 million in interest income on loans receivable as well as decreases in interest expense, offset in part by decreases in non-interest income and an increase in provision for loan losses.
Net Interest Income.  Net interest income for the fiscal 2014 third quarter increased by $2.7 million, or 30.2%, to $11.9 million from $9.2 million for the same period in the prior fiscal year primarily due to significant growth in lending by the Retail Bank, contributing to increased loan interest income. Additionally, the increase was driven by increased volume of other investments and increasing interest yield on MBS as a result of lower premium amortization on slower prepayment speeds.  Also, interest expense decreased from the comparable 2013 quarter.  The relative growth in the loan portfolio, increased yield achieved on MBS securities, and higher mix of loans to investments also aided net interest margin expansion.  Net interest margin increased to 2.86% for the third quarter of fiscal year 2014 as compared to 2.52% for the same period in fiscal year 2013.

Overall, when using a taxable equivalent yield (“TEY”), the Company’s interest earning asset yield increased by 31 basis points resulting partially from a change in asset mix which included a higher percentage of tax exempt income from municipal bonds and increased volume of loans receivable as a percentage of earning assets and their corresponding relatively higher yields in the fiscal 2014 third quarter compared to the same period in the prior fiscal year.  The yield on non-MBS investment securities increased by 5 basis points on a TEY basis.  Asset yields moderately expanded due to increased yields on the MBS portfolio.  The yield on government related MBS increased 60 basis points.  Average quarterly TEY on the securities portfolio increased by 43 basis points in the third quarter of fiscal 2014 compared to the same quarter of the prior year.  Net interest margin was also positively impacted by a 3 basis point decrease in the total cost of funds.  This decrease was primarily due to increasing MPS deposits and decreasing interest expense.  The Company’s average interest-earning assets for the fiscal 2014 third quarter grew by $226.3 million, or 13.7%, to $1.9 billion, up from $1.7 billion during the same quarter last fiscal year.

The Company’s average total deposits and interest-bearing liabilities for the 2014 third fiscal quarter increased $193.5 million, or 12.3%, to $1.8 billion from $1.6 billion for the same quarter last year.  This increase was generated primarily from an increase in MPS-related non-interest bearing deposits, time deposits and overnight federal funds purchased, slightly offset by a decrease in other borrowings.  MPS average quarterly deposits for the 2014 third fiscal quarter increased $106.3 million, or 9.1%, from the same period last year.  This increase resulted almost entirely from growth in existing core prepaid card programs.  Overall, rates on all deposits and interest-bearing liabilities decreased by 3 basis points from 0.17% in the 2013 third fiscal quarter to 0.14% in the 2014 period.  At June 30, 2014, low- and no-cost checking deposits represented 89.2% of total deposits compared to 89.8% one year earlier.
 
For the nine months ended June 30, 2014, net interest income was $34.0 million compared to $26.9 million for the same period in the prior fiscal year.  Contributing to this increase was an increase in asset yields of 25 basis points, an increased allocation to loans as a percentage of total interest earning assets, and increased volume in the loan and securities portfolio.  The TEY of MBS and other investments was 2.59% for the nine months ended June 30, 2014 and 2.23% for the same period in 2013.  Also contributing was a decrease in interest expense
The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.  Tax equivalent adjustments have been made in yield on interest bearing assets and net interest margin.  Non-accruing loans have been included in the table as loans carrying a zero yield.

Three Months Ended June 30,
  2014     2013  
(Dollars in Thousands)
 
Average
   
Interest
   
   
Average
   
Interest
   
 
 
 
Outstanding
   
Earned /
   
Yield /
   
Outstanding
   
Earned /
   
Yield /
 
   
 
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
Interest-earning assets:
 
   
   
   
   
   
 
Loans receivable
 
$
455,223
   
$
5,062
     
4.46
%
 
$
339,632
   
$
4,091
     
4.83
%
Mortgage-backed securities
   
694,117
     
3,898
     
2.25
%
   
734,894
     
3,024
     
1.65
%
Other investments and fed funds sold
   
729,858
     
3,606
     
2.78
%
   
578,400
     
2,710
     
2.74
%
Total interest-earning assets
   
1,879,198
   
$
12,566
     
2.99
%
   
1,652,926
   
$
9,825
     
2.68
%
Non-interest-earning assets
   
109,410
                     
80,280
                 
Total assets
 
$
1,988,608
                   
$
1,733,206
                 
 
                                               
Non-interest bearing deposits
 
$
1,299,987
   
$
-
     
0.00
%
 
$
1,189,436
   
$
-
     
0.00
%
Interest-bearing liabilities:
                                               
Interest-bearing checking
   
33,939
     
24
     
0.28
%
   
32,268
     
28
     
0.35
%
Savings
   
30,059
     
11
     
0.15
%
   
28,750
     
10
     
0.14
%
Money markets
   
41,724
     
19
     
0.18
%
   
40,778
     
24
     
0.24
%
Time deposits
   
107,471
     
178
     
0.66
%
   
95,337
     
224
     
0.94
%
FHLB advances
   
7,000
     
124
     
7.11
%
   
7,000
     
124
     
7.11
%
Overnight fed funds purchased
   
228,824
     
162
     
0.28
%
   
159,385
     
129
     
0.32
%
Other borrowings
   
16,712
     
120
     
2.88
%
   
19,283
     
127
     
2.64
%
Total interest-bearing liabilities
   
465,729
     
638
     
0.55
%
   
382,801
     
666
     
0.70
%
 
                                               
Total deposits and interest-bearing liabilities
   
1,765,716
   
$
638
     
0.14
%
   
1,572,237
   
$
666
     
0.17
%
Other non-interest bearing liabilities
   
61,759
                     
13,969
                 
Total liabilities
   
1,827,475
                     
1,586,206
                 
Shareholders' equity
   
161,133
                     
147,000
                 
Total liabilities and shareholders' equity
 
$
1,988,608
                   
$
1,733,206
                 
Net interest income and net interest rate spread including non-interest bearing deposits
         
$
11,928
     
2.85
%
         
$
9,159
     
2.51
%
 
                                               
Net interest margin
                   
2.86
%
                   
2.52
%

Nine Months Ended June 30,
  2014     2013  
(Dollars in Thousands)
 
Average
   
Interest
   
   
Average
   
Interest
   
 
 
 
Outstanding
   
Earned /
   
Yield /
   
Outstanding
   
Earned /
   
Yield /
 
  
 
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
Interest-earning assets:
 
   
   
   
   
   
 
Loans receivable
 
$
422,573
   
$
14,283
     
4.52
%
 
$
331,688
   
$
11,953
     
4.82
%
Mortgage-backed securities
   
702,127
     
11,506
     
2.19
%
   
702,984
     
9,069
     
1.72
%
Other investments and fed funds sold
   
705,394
     
10,001
     
2.68
%
   
598,181
     
8,151
     
2.58
%
Total interest-earning assets
   
1,830,094
   
$
35,790
     
2.92
%
   
1,632,853
   
$
29,173
     
2.67
%
Non-interest-earning assets
   
74,452
                     
78,697
                 
Total assets
 
$
1,904,546
                   
$
1,711,550
                 
 
                                               
Non-interest bearing deposits
 
$
1,322,209
   
$
-
     
0.00
%
 
$
1,198,913
   
$
-
     
0.00
%
Interest-bearing liabilities:
                                               
Interest-bearing checking
   
32,756
     
72
     
0.29
%
   
32,264
     
99
     
0.41
%
Savings
   
29,288
     
35
     
0.16
%
   
28,416
     
31
     
0.15
%
Money markets
   
40,788
     
56
     
0.18
%
   
40,426
     
77
     
0.25
%
Time deposits
   
105,463
     
563
     
0.71
%
   
91,754
     
788
     
1.15
%
FHLB advances
   
7,000
     
371
     
7.09
%
   
8,448
     
603
     
9.57
%
Overnight fed funds purchased
   
167,403
     
364
     
0.29
%
   
128,100
     
318
     
0.33
%
Other borrowings
   
18,819
     
370
     
2.63
%
   
21,079
     
396
     
2.51
%
Total interest-bearing liabilities
   
401,517
     
1,831
     
0.61
%
   
350,487
     
2,312
     
0.88
%
Total deposits and interest-bearing liabilities
   
1,723,726
   
$
1,831
     
0.14
%
   
1,549,400
   
$
2,312
     
0.20
%
Other non-interest bearing liabilities
   
28,367
                     
16,335
                 
Total liabilities
   
1,752,093
                     
1,565,735
                 
Stockholders' equity
   
152,453
                     
145,815
                 
Total liabilities and stockholders' equity
 
$
1,904,546
                   
$
1,711,550
                 
Net interest income and net interest rate spread including non-interest bearing deposits
         
$
33,959
     
2.78
%
         
$
26,861
     
2.47
%
 
                                               
Net interest margin
                   
2.78
%
                   
2.48
%

The following table presents, for the periods indicated, the Company’s total dollar amount of interest income from average securities portfolio assets and the resulting yields expressed both in dollars and rates.  Tax equivalent adjustments have been made in yield.
 
Three Months Ended June 30,
  2014     2013  
(Dollars in Thousands)
 
Average
   
Interest
   
   
Average
   
Interest
   
 
 
 
Outstanding
   
Earned /
   
Yield /
   
Outstanding
   
Earned /
   
Yield /
 
   
 
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
Securities Portfolio Assets
 
   
   
   
   
   
 
Mortgage-backed securities
   
694,118
     
3,898
     
2.25
%
   
734,894
     
3,024
     
1.65
%
*Other investments
   
645,010
     
3,487
     
3.07
%
   
510,976
     
2,613
     
3.02
%
Total Securities Portfolio Assets
 
$
1,339,128
   
$
7,385
     
2.65
%
 
$
1,245,870
   
$
5,637
     
2.21
%

*Excludes FHLB Stock

(1) Tax rate used to arrive at a TEY for three months ended June 2013 is 35%
(2) Tax rate used to arrive at a TEY for three months ended June 2014 is 34%

Nine Months Ended June 30,
  2014     2013  
(Dollars in Thousands)
 
Average
   
Interest
   
   
Average
   
Interest
   
 
 
 
Outstanding
   
Earned /
   
Yield /
   
Outstanding
   
Earned /
   
Yield /
 
 
 
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
Securities Portfolio Assets
 
   
   
   
   
   
 
Mortgage-backed securities
   
702,127
     
11,506
     
2.19
%
   
702,984
     
9,069
     
1.72
%
*Other investments
   
607,936
     
9,683
     
3.04
%
   
516,204
     
7,874
     
2.91
%
Total Securities Portfolio Assets
   
1,310,063
   
$
21,189
     
2.59
%
   
1,219,188
   
$
16,943
     
2.23
%

*Excludes FHLB Stock

(1) Tax rate used to arrive at a TEY for nine months ended June 2013 is 35%
(2) Tax rate used to arrive at a TEY for nine months ended June 2014 is 34%

Provision for Loan Losses.  The Company recorded a $0.3 million and $0.6 million provision for loan losses in the three and nine month periods ended June 30, 2014, respectively, as compared to no provision and a negative provision for loan losses of $0.3 million for the comparable three and nine month periods of fiscal year 2013.  This was the result of the evaluation of the allowance for loan loss as explained in Note 3 to the Condensed Consolidated Financial Statements.
 
Non-Interest Income.  Non-interest income for the fiscal 2014 third quarter decreased by $1.1 million, or 8.0%, to $12.5 million from $13.6 million for the same period in the prior fiscal year.  The change was due to a decrease of $0.7 million in card fees and $0.5 million decrease in gain on sale of securities.  Fees earned on MPS‑related programs decreased to $11.8 million for the third quarter of fiscal year 2014, compared to $12.5 million for the same period in fiscal year 2013.  Noted decreases were primarily due to reductions in tax-related prepaid card volume.
 
For the nine months ended June 30, 2014, non-interest income decreased by $3.0 million, or 7.0%, to $39.1 million from $42.1 million for the same period in the prior fiscal year.  For the nine months ended June 30, 2014 and 2013, the Bank sold mortgage-backed and investment securities resulting in a gain on sale of available for sale securities in the amount of $0.1 million and $2.5 million, respectively.  In addition, fees earned on MPS-related programs were $36.8 million for the nine months ended June 30, 2014, compared to $38.0 million for the same period in fiscal year 2013.  These decreases were offset in part by increases in loan fees, non-interest income from bank owned life insurance, and a gain in foreclosed real estate during the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013.

Non-Interest Expense.  Non-interest expense increased to $18.8 million for the third quarter of fiscal year 2014 as compared to $18.0 million for the same period in fiscal year 2013.  Non-interest expense increased by $0.9 million, or 1.7%, to $57.6 million for the nine months ended June 30, 2014 from $56.7 million for the same period in fiscal year 2013.
Compensation expense increased $0.8 million to $9.3 million for the three months ended June 30, 2014 as compared to $8.5 million for the same period in fiscal year 2013 as a result of the Company’s investments in resources to support regulatory, operational and growth initiatives.  Compensation expense increased $2.4 million to $28.3 million for the nine months ended June 30, 2014 from $25.9 million for the same period in fiscal year 2013 due primarily to a 3% increase in overall staffing.
 
Card processing expense increased $0.4 million to $3.9 million for the three months ended June 30, 2014 as compared to $3.5 million for the same period in fiscal year 2013.  Card processing expense decreased $0.4 million to $11.7 million for the nine months ended June 30, 2014 as compared to $12.1 million for the same period in fiscal year 2013 primarily due to the previously mentioned tax-related program.
 
Occupancy and equipment expense increased $0.7 million to $6.9 million for the nine months ended June 30, 2014 as compared to $6.2 million for the same period in fiscal year 2013 related to compliance system investments being implemented over the last year.
 
Legal and consulting expense decreased by $0.6 million to $0.5 million for the three months ended June 30, 2014 as compared to $1.2 million for the same period in fiscal year 2013 due to lower consulting expenses related to compliance functions during the current year.
 
Other expense decreased $1.0 million to $6.4 million for the nine months ended June 30, 2014 as compared to $7.4 million for the same period in fiscal year 2013 due to a decrease in risk category rating for FDIC insurance.
 
Income Tax.  Income tax expense for the third quarter of fiscal year 2014 was $1.1 million, or an effective tax rate of 20.3%, compared to income tax expense of $1.0 million, or an effective tax rate of 21.8%, for the same period in the prior fiscal year.  The decrease in the effective tax rate is mainly the result of an increase in the volume of tax exempt municipal bonds owned by the Company combined with disqualifying dispositions of employee incentive stock option exercises.
 
For the nine months ended June 30, 2014, the Company recorded an income tax expense in the amount of $2.5 million, or an effective tax rate of 16.8%, compared to $2.6 million, or an effective tax rate of 20.7% for the same period in the prior fiscal year.  The decrease in effective tax rate for this time period was caused by the same reasons mentioned in the preceding paragraph.

LIQUIDITY AND CAPITAL RESOURCES
 
The Company’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities.  While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments can be influenced by the level of interest rates, general economic conditions, and competition.
 
The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses.  At June 30, 2014, the Company had commitments to originate and purchase loans and unused lines of credit totaling $95.5 million.  The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.  At June 30, 2014, the Company had $3.5 million of commitments to purchase securities.
 
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 June 30, 2014, the Bank met all capital adequacy requirements.
The Bank’s actual and required capital amounts and ratios are presented in the following table.
 
 
 
   
   
   
   
Minimum
 
 
 
   
   
   
   
Requirement to Be
 
 
 
   
   
Minimum
   
Well Capitalized
 
 
 
   
   
Requirement For
   
Under Prompt
 
 
 
   
   
Capital Adequacy
   
Corrective Action
 
 
 
Actual
   
Purposes
   
Provisions
 
At June 30, 2014
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
 
 
(Dollars in Thousands)
 
 
 
   
   
   
   
   
 
MetaBank
 
   
   
   
   
   
 
Tangible capital (to tangible assets)
 
$
173,139
     
9.00
%
 
$
28,845
     
1.50
%
 
$
n/
a
   
n/a
%
Tier 1 (core) capital (to adjusted total assets)
   
173,139
     
9.00
     
76,921
     
4.00
     
96,151
     
5.00
 
Tier 1 (core) capital (to risk-weighted assets)
   
173,139
     
21.52
     
32,178
     
4.00
     
48,266
     
6.00
 
Total risk-based capital (to risk-weighted assets)
   
178,034
     
22.13
     
64,355
     
8.00
     
80,444
     
10.00
 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five regulatory capital categories and authorized the banking regulators to take prompt corrective action with respect to institutions in an undercapitalized category.  At June 30, 2014, the Bank exceeded all requirements for the well capitalized category.
 
In July 2013, the Bank’s primary federal regulator, the Federal Reserve, and the Bank’s primary federal regulator, the OCC, approved final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards.  The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including us and the Bank, as compared to the current U.S. general risk-based capital rules. The Basel III Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios.  The Basel III Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the Basel III Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rules are effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.
 
We believe that the Bank will be able to meet targeted capital ratios upon implementation of the revised requirements, as finalized.
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
MARKET RISK
 
The Company is exposed to the impact of interest rate changes and changes in the market value of its investments.
 
The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate and fixed-rate loan products with short to intermediate terms to maturity, generally five years or less except for residential mortgage loans.  This theoretically allows the Company to maintain a portfolio of loans that will have relatively little sensitivity to changes in the level of interest rates, while providing a reasonable spread to the cost of liabilities used to fund the loans.
The Company’s primary objective for its investment portfolio is to provide a source of liquidity for the Company.  In addition, the investment portfolio may be used in the management of the Company’s interest rate risk profile.  The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company’s need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and to fulfill the Company’s asset/liability management goals.
 
The Company’s cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio, and due to the relatively short-term nature of its borrowed funds.  The Company believes that its growing portfolio of low- or no-cost deposits provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest rate environment than it would otherwise have without this portfolio.  This risk is due to the fact that, while asset yields may decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with these deposits, which thereby compresses the Company’s net interest margin.  As a result of the Company’s interest rate risk exposure in this regard, the Company has elected not to enter in to any new longer term wholesale borrowings, and generally has not emphasized longer term time deposit products.
 
The Board of Directors and relevant government regulations establish limits on the level of acceptable interest rate risk at the Company, to which management adheres.  There can be no assurance, however, that, in the event of an adverse change in interest rates, the Company’s efforts to limit interest rate risk will be successful.
 
Interest Rate Risk
 
Overview.  The Company actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings.  The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets.  The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction, magnitude, and speed of interest rate changes, as well as the slope of the yield curve.  The Company does not currently engage in trading activities to control interest rate risk although it may do so in the future, if deemed necessary, to help manage interest rate risk.
 
Earnings at risk and economic value analysis. As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income.  In order to properly monitor interest rate risk, the Board of Directors has created an Investment Committee whose principal responsibilities are to assess the Bank’s asset/liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes in interest rates.
 
The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value of Equity (“EVE analysis”).  Under EAR analysis, net interest income is calculated for each interest rate scenario to the net interest income forecast in the base case.  EAR analysis measures the sensitivity of interest sensitive earnings over a one year minimum time horizon.  The results are affected by projected rates, prepayments, caps and floors. Market implied forward rates and various likely and extreme interest rate scenarios can be used for EAR analysis.  These likely and extreme scenarios can include rapid and gradual interest rate ramps, rate shocks and yield curve twists.
 
The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management.  It models -100, +100, +200, +300 basis point parallel shifts in market interest rates over the next one-year period.  Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.
The Company is within Board policy limits for the -100 and +100 scenarios. The company is slightly outside of Board policy limits for the +200 and +300 scenarios as noted in the below commentary. The table below shows the results of the scenarios as of June 30, 2014:
 
Net Sensitive Earnings at Risk
 
Net Sensitive Earnings at Risk
 
 
 
Standard (Parallel Shift) Year 1
 
 
 
Net Interest Income at Risk %
 
 
   
-100
     
+100
     
+200
     
+300
 
Basis Point Change Scenario
   
-2.1
%
   
-5.0
%
   
-10.1
%
   
-15.3
%
Board Policy Limits
   
-5.0
%
   
-5.0
%
   
-10.0
%
   
-15.0
%

The EAR analysis reported at June 30, 2014, shows that more liabilities (primarily the overnight federal funds purchased) than assets will reprice over the modeled one-year period.
 
The Company’s overnight federal funds purchased fluctuates on a daily basis due to the nature of a portion of its non-interest bearing deposit base, primarily related to payroll processing timing.  Interest rate risk (“IRR”) is a snapshot in time. The Company’s IRR results vary depending on which day of the week this snapshot is taken. IRR was negatively affected because the fiscal 2014 third quarter ended on a Monday, which, due to payroll processing timing in concert with typical weekend activity, tend to necessitate a higher than average amount of overnight federal funds purchased which are typically paid down throughout the week.  For perspective, the amount of federal funds purchased on Monday, June 30th, was well over $130 million higher than the average amount of federal funds purchased throughout the previous business week. Management and the Board are aware and understand these typical borrowing and deposit fluctuations as well as the point in time nature of IRR analysis and anticipated an outcome where the Company may temporarily be slightly outside of Board policy limits.  Management and the Board are comfortable with the Company’s current IRR position.  Management is currently assessing options to mitigate the effect of certain weekly borrowing volatility and has several viable options it may pursue.

The following table shows the income sensitivity of selected assets and liabilities to changes in market interest rates (dollars in thousands).

 
 
   
   
Change in Interest Income/Expense
 
 
 
   
% of
   
for a given change in interest rates
 
 
 
Total Earning
   
Total Earning
   
Over / (Under) Base Case Parallel Ramnp
 
Basis Point Change Scenario
 
Assets
   
Assets
     
-100
   
Base
     
+100
     
+200
     
+300
 
Total Loans
   
471,747
     
25.7
%
   
21,509
     
22,257
     
23,038
     
23,939
     
24,872
 
Total Investments (non-TEY) and other Earning Assets
   
1,362,554
     
74.3
%
   
25,131
     
26,009
     
27,295
     
28,456
     
29,595
 
Total Interest-Sensitive Income
   
1,834,301
     
100.0
%
   
46,640
     
48,266
     
50,333
     
52,395
     
54,467
 
Total Interest-Bearing Deposits
   
223,046
     
37.3
%
   
644
     
863
     
1,676
     
2,541
     
3,461
 
Total Borrowings
   
375,478
     
62.7
%
   
1,089
     
1,548
     
5,080
     
8,612
     
12,145
 
Total Interest-Sensitive Expense
   
598,524
     
100.0
%
   
1,733
     
2,411
     
6,756
     
11,153
     
15,606
 

The Company believes that its growing portfolio of non-interest bearing deposits provides a stable and profitable funding vehicle and a significant competitive advantage in a rising interest rate environment as the Company’s cost of funds will likely remain relatively low, with less increase expected relative to other banks.  The Company continues to execute its investment strategy of primarily purchasing NBQ municipal bonds and agency MBS, however, the bank reviews opportunities to add diverse, high quality securities at attractive relative rates when opportunities present themselves.  The NBQ municipal bonds are tax exempt and as such have a tax equivalent yield higher than their book yield.  The tax equivalent yield calculation for NBQ municipal bonds uses the Company’s cost of funds as one of its components.  With the Company’s large volume of non-interest bearing deposits, the tax equivalent yield for these NBQ municipal bonds is higher than a similar term investment in other investment categories of similar risk and higher than most other banks can realize on the same instruments.

Under EVE analysis, the economic value of financial assets, liabilities and off-balance sheet instruments, is derived under each rate scenario.  The economic value of equity is calculated as the difference between the estimated market value of assets and liabilities, net of the impact of off-balance sheet instruments.
 
The EVE analysis used in the following table reflects the required analysis used no less than quarterly by management.  It models immediate -100, +100, +200 and +300 basis point parallel shifts in market interest rates.  Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.
 
The Company is within Board policy limits for all basis point scenarios. The table below shows the results of the scenario as of June 30, 2014:
 
Economic Value Sensitivity
 
 
 
Standard (Parallel Shift)
 
 
 
Economic Value of Equity at Risk %
 
   
-100
     
+100
     
+200
     
+300
 
Basis Point Change Scenario
   
-4.7
%
   
-1.0
%
   
-4.2
%
   
-8.8
%
Board Policy Limits
   
-10.0
%
   
-10.0
%
   
-20.0
%
   
-30.0
%

The EVE at risk reported at June 30, 2014, shows that as interest rates increase immediately, the economic value of equity position will decrease, since the amount of assets is greater than the amount of liabilities.
 
The following table details the economic value sensitivity to changes in market interest rates at June 30, 2014, for loans, investments, deposits, borrowings, and other assets and liabilities (dollars in thousands).  The analysis reflects that, in a +100, +200, and +300 higher rate scenario, total assets are less sensitive than total liabilities.  Investments contribute to sensitivity, largely due to fixed rate securities investments.  Day of the week timing, as discussed previously, also contributes to sensitivity.  This sensitivity is offset by the non-interest bearing deposits.
 
 
   
   
Change in Economic Value
 
 
 
   
% of
   
for a given change in interest rates
 
 
 
Book
   
Total
   
Over / (Under) Base Case Parallel Ramnp
 
Basis Point Change Scenario
 
Value
   
Assets
     
-100
     
+100
     
+200
     
+300
 
Total Loans
   
471,747
     
24.6
%
   
2.3
%
   
-3.1
%
   
-6.0
%
   
-8.8
%
Total Investments (non-TEY) and other Earning Assets
   
1,334,620
     
69.5
%
   
4.0
%
   
-4.5
%
   
-9.0
%
   
-13.4
%
Other Assets
   
113,716
     
5.9
%
   
0.0
%
   
0.0
%
   
0.0
%
   
0.0
%
Assets
   
1,920,083
     
100.0
%
   
3.3
%
   
-3.9
%
   
-7.7
%
   
-11.4
%
Interest-Bearing Deposits
   
223,046
     
12.8
%
   
1.8
%
   
-1.6
%
   
-3.1
%
   
-4.3
%
Non-Interest Bearing Deposits
   
1,129,431
     
64.5
%
   
7.2
%
   
-6.7
%
   
-12.7
%
   
-18.1
%
Total Borrowings and Other Liabilities
   
397,496
     
22.7
%
   
0.1
%
   
-0.1
%
   
-0.3
%
   
-0.4
%
Liabilities
   
1,749,973
     
100.0
%
   
4.7
%
   
-4.4
%
   
-8.3
%
   
-11.9
%

Certain shortcomings are inherent in the method of analysis presented in the table.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.  Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Furthermore, although management has estimated changes in the levels of prepayments and early withdrawal in these rate environments, such levels would likely deviate from those assumed in calculating the table.  Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.

Item 4. Controls and Procedures
 
CONTROLS AND PROCEDURES
 
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met.  Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
 
DISCLOSURE CONTROLS AND PROCEDURES
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by the report.
 
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2014, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this report was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
 
FORM 10-Q
 
Item 1. Legal Proceedings – See “Legal Proceedings” of Note 6 to the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.
 
Item 1A. Risk Factors - In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2013 (our “2013 Form 10-K”). Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially and adversely affect us in the future.
 
Following is the restated text of two risk factors with changes that have occurred since our publication of risk factors in our 2013 Form 10-K. There have been no material changes from the risk factors disclosed in our 2013 Form 10-K as supplemented in our Form 10-Q for the period ended June 30, 2014, other than as discussed below.

Our most recent Community Reinvestment Act (“CRA”) rating was an upgrade to “Satisfactory.”  A less than “Satisfactory” CRA rating could have a negative effect on the OCC’s review of certain banking applications.

Under the CRA, the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting its continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate income neighborhoods.  In the Bank’s most recent CRA examination dated February 13, 2014, the Bank received an overall rating of “Satisfactory.”  If the bank were to receive a future CRA rating of less than “Satisfactory,” the CRA requires the OCC to take such rating into account in considering an application for any of the following:  (i) the establishment of a domestic branch; (ii) the relocation of its main office or of a branch; (iii) the merger or consolidation with or acquisition of assets or assumption of liabilities of an insured depository institution; or (iv) the conversion of the Bank to a national charter.

Contracts with third-parties, some of which are material to the Company, may not be renewed, may be renegotiated on terms that are not as favorable, may not be fulfilled or could be subject to cancellation by regulatory authorities.

The Bank has entered into numerous contracts with third parties with respect to the operations of its business. In some instances, the third parties provide services to the Bank and MPS; in other instances, the Bank and MPS provides products and services to such third parties. Were such agreements not to be renewed by the third party or were such agreements to be renewed on terms less favorable, such actions could have an adverse material impact on the Bank, its MPS division, and, ultimately, the Company. Similarly, were one of these parties unable to meet their obligations to us for any reason (including but not limited to bankruptcy, computer or other technological interruptions or failures, personnel loss or acts of God), we may need to seek alternative service providers.

We may not be able to secure alternate service providers, and even if we do, the terms with such alternate providers may not be as favorable as those currently in place. In addition, were we to lose any of our important third service providers, it could cause a material disruption in our own ability to service our customers, which also could have an adverse material impact on the Bank, its MPS division, and ultimately the Company. Moreover, were the disruptions in our ability to provide services significant, this could negatively affect the perception of our business, which could result in a loss of confidence and other adverse effects on our business.
In addition, as described earlier, in the Consent Orders, our regulator noted deficiencies with respect to these third party relationships. As a result, we review our auditing program for third parties with whom we contract (as well as other business changes required both by the Consent Orders and general business practices) and have made certain business decisions related to determinations reached by our auditing personnel. The OCC is evaluating our progress at this time. If we are unsuccessful in the development and/or implementation of our third party auditing program, it is possible that the OCC could order us to abrogate certain contracts or take other supervisory actions against us which would further impact the MPS business and could have an adverse impact on our financial condition or results of operations. See “Business Regulation – Bank Supervision and Regulation - OTS Consent Orders and Related Matters” which is included in Item 1 of our 2013 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None
 
Item 3 Defaults Upon Senior Securities - None
 
Item 4. Mine Safety Disclosures - Not Applicable
 
Item 5. Other InformationCommunity Reinvestment Act.  Under the Community Reinvestment Act (the “CRA”), the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting its continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.  In the Bank’s most recent CRA examination dated February 13, 2014, the Bank received an overall rating of “Satisfactory.”  In the Bank’s prior CRA examination dated January 24, 2011, the Bank received a “Needs to Improve” rating.
 
Item 6. Exhibits
 
See Index to Exhibits.
META FINANCIAL GROUP, INC.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
META FINANCIAL GROUP, INC.
 
 
Date: August 5, 2014
By:  /s/ J. Tyler Haahr
 
J. Tyler Haahr, Chairman of the Board
 
and Chief Executive Officer
 
 
Date: August 5, 2014
By:  /s/ Glen W. Herrick
 
Glen W. Herrick, Executive Vice President
 
and Chief Financial Officer

INDEX TO EXHIBITS

Exhibit
Number
Description
 
 
Section 302 certification of Chief Executive Officer.
 
Section 302 certification of Chief Financial Officer.
 
Section 906 certification of Chief Executive Officer.
 
Section 906 certification of Chief Financial Officer.
 
101.INS
Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document