Edgar Filing: META FINANCIAL GROUP INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended March 31, 2010

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		(I.R.S. Employer Identification No.)
incorporation or organization)

121 East Fifth Street, Storm Lake, Iowa 50588

(Address of principal executive offices)

(712) 732-4117

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o NO o.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller Reporting Company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES 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 May 13, 2010:
Common Stock, $.01 par value		3,082,362 Common Shares

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Explanatory Note

This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) is being filed by Meta Financial Group, Inc. to amend the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 filed with the Securities and Exchange Commission on May 11, 2010 (the “Initial Report”). The sole purpose for filing this Amendment No. 1 is to disclose developments in the legal proceedings discussed in Note 5 to the Notes to Condensed Consolidated Financial Statements in the Initial Report. No other changes have been made to the Initial Report, nor does Amendment No. 1 change previously reported financial results or other financial disclosures contained in the Initial Report. This Amendment No. 1 has not been updated to reflect events occurring after the filing of the Initial Report.

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META FINANCIAL GROUP, INC.

FORM 10-Q/A

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		Page No.

Part I. Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of Financial Condition as of March 31, 2010 and September 30, 2009	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009	2

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2010 and 2009	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2010 and 2009	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34

Item 4T.	Controls and Procedures	36

Part II. Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Reserved	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

Signatures		38

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

	March 31, 2010			September 30, 2009

ASSETS

Cash and cash equivalents	$	16,570		$	6,168
Federal funds sold	—			9
Investment securities available for sale	19,351			17,566
Mortgage-backed securities available for sale	483,931			347,272
Loans receivable - net of allowance for loan losses of $17,521 at March 31, 2010 and $6,993 at September 30, 2009	382,519			391,609
Federal Home Loan Bank Stock, at cost	6,961			7,050
Accrued interest receivable	4,330			4,344
Bond insurance receivable	3,993			4,118
Premises, furniture, and equipment, net	21,251			21,989
Bank-owned life insurance	13,532			13,270
Foreclosed real estate and repossessed assets	1,247			2,053
Goodwill and intangible assets	2,720			2,215
MPS accounts receivable	7,222			5,381
Other assets	18,283			11,733

Total assets	$	981,910		$	834,777

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Non-interest-bearing checking	$	590,684		$	442,158
Interest-bearing checking	20,076			15,602
Savings deposits	10,534			10,001
Money market deposits	33,252			39,823
Time certificates of deposit	124,830			146,163
Total deposits	779,376			653,747
Advances from Federal Home Loan Bank	98,300			74,800
Other borrowings from Federal Reserve Bank	—			25,000
Securities sold under agreements to repurchase	7,407			6,686
Subordinated debentures	10,310			10,310
Accrued interest payable	338			447
Contingent liability	4,118			4,268
Accrued expenses and other liabilities	20,943			12,174
Total liabilities	920,792			787,432

SHAREHOLDERS’ EQUITY
Preferred stock, 800,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $.01 par value; 5,200,000 shares authorized, 3,372,999 shares issued, 3,072,502 and 2,634,215 shares outstanding at March 31, 2010 and September 30, 2009, respectively	34			30
Additional paid-in capital	31,942			23,551
Retained earnings - substantially restricted	37,251			31,626
Accumulated other comprehensive (loss)	(2,746		)	(1,838		)
Treasury stock, 300,497 and 323,784 common shares, at cost, at March 31, 2010 and September 30, 2009, respectively	(5,363		)	(6,024		)
Total shareholders’ equity	61,118			47,345

Total liabilities and shareholders’ equity	$	981,910		$	834,777

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands, Except Share and Per Share Data)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010		2009

Interest and dividend income:
Loans receivable, including fees	$	7,376		$	7,536		$	14,101	$	13,908
Mortgage-backed securities	2,827			2,797			4,982		4,805
Other investments	180			200			364		547
	10,383			10,533			19,447		19,260
Interest expense:
Deposits	949			1,429			2,037		2,973
FHLB advances and other borrowings	433			860			1,090		1,882
	1,382			2,289			3,127		4,855

Net interest income	9,001			8,244			16,320		14,405

Provision for loan losses	9,478			10,270			14,169		12,399

Net interest income after provision for loan losses	(477		)	(2,026		)	2,151		2,006

Non-interest income:
Card fees	37,116			32,988			56,660		48,086
Gain on sale of securities available for sale, net	—			9			1,854		9
Deposit fees	190			177			394		378
Bank-owned life insurance income	132			131			262		258
Loan fees	65			231			178		330
Other income	133			75			326		85
Total non-interest income	37,636			33,611			59,674		49,146

Non-interest expense:
Card processing expense	14,095			14,861			22,447		20,111
Compensation and benefits	8,861			8,342			17,532		15,781
Occupancy and equipment expense	2,159			2,049			4,234		3,853
Legal and consulting expense	835			925			1,826		2,045
Marketing	483			474			838		812
Data processing expense	177			816			369		1,272
Other expense	2,256			2,183			4,423		4,328
Total non-interest expense	28,866			29,650			51,669		48,202


Income before income tax expense	8,293			1,935			10,156		2,950

Income tax expense	3,119			760			3,790		1,102

Net income	$	5,174		$	1,175		$	6,366	$	1,848

Earnings per common share:
Basic	$	1.76		$	0.45		$	2.29	$	0.71
Diluted	$	1.74		$	0.45		$	2.26	$	0.71


Dividends declared per common share:	$	0.13		$	0.13		$	0.26	$	0.26

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2010		2009			2010			2009

Net income	$	5,174	$	1,175		$	6,366		$	1,848

Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities available for sale	1,525		(1,243		)	(3,301		)	(196		)
Gains realized in net income	—		9			1,854			9
	1,525		(1,234		)	(1,447		)	(187		)
Deferred income tax effect	569		(460		)	(539		)	(70		)
Total other comprehensive income (loss)	956		(774		)	(908		)	(117		)
Total comprehensive income	$	6,130	$	401		$	5,458		$	1,731

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended March 31, 2010 and 2009

(Dollars in Thousands, Except Share and Per Share Data)

									Accumulated
									Other
			Additional						Comprehensive						Total
	Common		Paid-in			Retained			(Loss),			Treasury			Shareholders’
	Stock		Capital			Earnings			Net of Tax			Stock			Equity

Balance, September 30, 2008	$	30	$	23,058		$	34,442		$	(5,022	)	$	(6,775	)	$	45,733

Cash dividends declared on common stock ($.26 per share)	—		—			(675		)	—			—			(675		)

Stock compensation	—		290			—			—			—			290

Change in net unrealized losses on securities available for sale	—		—			—			(117		)	—			(117		)

Net income for six months ended March 31, 2009	—		—			1,848			—			—			1,848

Balance, March 31, 2009	$	30	$	23,348		$	35,615		$	(5,139	)	$	(6,775	)	$	47,079

Balance, September 30, 2009	$	30	$	23,551		$	31,626		$	(1,838	)	$	(6,024	)	$	47,345

Cash dividends declared on common stock ($.26 per share)	—		—			(741		)	—			—			(741		)

Issuance of 415,000 common shares from the sales of equity securities	4		8,571			—			—			—			8,575

Issuance of 23,287 common shares from treasury stock due to issuance of restricted stock and exercise of stock options	—		(271		)	—			—			661			390

Stock compensation	—		91			—			—			—			91

Change in net unrealized losses on securities available for sale	—		—			—			(908		)	—			(908		)

Net income for six months ended March 31, 2010	—		—			6,366			—			—			6,366

Balance, March 31, 2010	$	34	$	31,942		$	37,251		$	(2,746	)	$	(5,363	)	$	61,118

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC.®

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Six Months Ended March 31,
	2010			2009

Cash flows from operating activities:
Net income	$	6,366		$	1,848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net	6,053			1,983
Provision for loan losses	14,169			12,399
Loss (gain) on sale of other	5			(39		)
(Gain) on sale of available for sale securities, net	(1,854		)	(9		)
Net change in accrued interest receivable	14			408
Net change in other assets	(9,033		)	1,254
Net change in accrued interest payable	(109		)	166
Net change in accrued expenses and other liabilities	8,619			5,225
Net cash provided by operating activities	24,230			23,235

Cash flow from investing activities:
Purchase of securities available for sale	(287,973		)	(156,114		)
Net change in federal funds sold	9			4,972
Proceeds from sales of securities available for sale	38,401			903
Proceeds from maturities and principal repayments of securities available for sale	107,379			23,040
Loans purchased	(392		)	(7,054		)
Net other change in loans receivable	(4,653		)	(408		)
Proceeds from sales of foreclosed real estate	807			—
Net change in Federal Home Loan Bank stock	89			1,305
Proceeds from the sale of premises and equipment	—			1
Purchase of premises and equipment	(1,199		)	(2,309		)
Other, net	539			70
Net cash used in investing activities	(146,993		)	(135,594		)

Cash flows from financing activities:
Net change in checking, savings, and money market deposits	146,962			123,305
Net change in time deposits	(21,333		)	17,365
Net change in advances from Federal Home Loan Bank and other borrowings	(1,500		)	(31,075		)
Net change in securities sold under agreements to repurchase	721			16,911
Cash dividends paid	(741		)	(675		)
Proceeds from issuance of equity securities	8,575			—
Stock compensation	91			290
Proceeds from exercise of stock options	390			—
Net cash provided by financing activities	133,165			126,121

Net change in cash and cash equivalents	10,402			13,762

Cash and cash equivalents at beginning of period	6,168			2,963
Cash and cash equivalents at end of period	$	16,570		$	16,725

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	3,235		$	4,689
Income taxes	64			2,055

Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate	$	—		$	3,775

See Notes to Condensed Consolidated Financial Statements.

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META FINANCIAL GROUP, INC. ®

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1. BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2009 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 10, 2009. Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended March 31, 2010, are not necessarily indicative of the results expected for the year ending September 30, 2010.

NOTE 2. ALLOWANCE FOR LOAN LOSSES

At March 31, 2010 the Company’s allowance for loan losses was $17.5 million, an increase of $10.5 million from $7.0 million at September 30, 2009. During the six months ended March 31, 2010 the Company recorded a provision for loan losses of $14.2 million. $11.1 million related to the Company’s Meta Payment Systems® (“MPS”) division, of which $10.5 million related to loan originations offered in collaboration with a nationally known tax preparation firm. This level of anticipated losses is within the financial model for this program. In addition to the Company’s loss provision, the contractual arrangement with this firm provides for substantial, but not full, reimbursement of financial losses, if any. During the six months ended March 31, 2010, the Company recorded a retail bank provision in the amount of $3.1 million due to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans. Two loans with commercial borrowers were partially charged off in the amount of $4.2 million during the second quarter of fiscal 2010. These two loans were previously reserved for and classified as doubtful.

During the three months ended March 31, 2010, the Company recorded a provision for loan losses in the amount of $9.5 million, consisting of $7.5 million related to the MPS tax loan portfolio and $2.0 million primarily related to increases in the general reserves and in the historical loss rates for commercial real estate and multi-family loans. The Company’s total net charge-offs for the three and six months ended March 31, 2010 were $4.1 million and $3.6 million, respectively, due to recoveries exceeding charged-off loans by $0.5 million in the first fiscal quarter. Further discussion of this change in the allowance is included in “Financial Condition - Non-performing Assets and Allowance for Loan Loss” in Management’s Discussion and Analysis.

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NOTE 3. EARNINGS PER COMMON SHARE (“EPS”)

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

A reconciliation of the income and common stock share amounts used in the computation of basic and diluted EPS for the three and six months ended March 31, 2010 and 2009 is presented below.

Three Months Ended March 31,	2010			2009
(Dollars in Thousands, Except Share and Per Share Data)

Earnings
Net Income	$	5,174		$	1,175

Basic EPS
Weighted average common shares outstanding	2,942,383			2,602,655
Less weighted average unallocated ESOP and nonvested shares	(3,334		)	(5,000		)
Weighted average common shares outstanding	2,939,049			2,597,655

Earnings Per Common Share
Basic	$	1.76		$	0.45

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,939,049			2,597,655
Add dilutive effect of assumed exercises of stock options, net of tax benefits	33,710			—
Weighted average common and dilutive potential common shares outstanding	2,972,759			2,597,655

Earnings Per Common Share
Diluted	$	1.74		$	0.45

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Six Months Ended March 31,	2010			2009
(Dollars in Thousands, Except Share and Per Share Data)

Earnings
Net Income	$	6,366		$	1,848

Basic EPS
Weighted average common shares outstanding	2,788,866			2,602,655
Less weighted average unallocated ESOP and nonvested shares	(3,334		)	(5,000		)
Weighted average common shares outstanding	2,785,532			2,597,655

Earnings Per Common Share
Basic	$	2.29		$	0.71

Diluted EPS
Weighted average common shares outstanding for basic earnings per common share	2,785,532			2,597,655
Add dilutive effect of assumed exercises of stock options, net of tax benefits	36,630			—
Weighted average common and dilutive potential common shares outstanding	2,822,162			2,597,655

Earnings Per Common Share
Diluted	$	2.26		$	0.71

Stock options totaling 363,464 and 348,014 were not considered in computing diluted EPS for the three and six months ended March 31, 2010, respectively, because they were not dilutive. Stock options totaling 301,468 and 511,674 were not considered in computing diluted EPS for the three and six months ended March 31, 2009, respectively, because they were not dilutive. The calculation of the diluted EPS for the three and six months ended March 31, 2009 does not reflect the assumed exercise of 34,395 and 39,933 stock options, respectively, because the effect would have been anti-dilutive for the period.

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NOTE 4. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale securities as of March 31, 2010 and September 30, 2009 are presented below.

			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		(LOSSES)			VALUE
	(Dollars in Thousands)
March 31, 2010

Debt securities
Trust preferred and corporate securities	$	25,810	$	—	$	(8,798	)	$	17,012
Obligations of states and political subdivisions	2,255		84		—			2,339
Mortgage-backed securities	479,596		5,950		(1,615		)	483,931
Total debt securities	$	507,661	$	6,034	$	(10,413	)	$	503,282

			GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		(LOSSES)			VALUE
	(Dollars in Thousands)
September 30, 2009

Debt securities
Trust preferred and corporate securities	$	25,805	$	—	$	(10,604	)	$	15,201
Obligations of states and political subdivisions	2,258		107		—			2,365
Mortgage-backed securities	339,706		7,662		(96		)	347,272
Total debt securities	$	367,769	$	7,769	$	(10,700	)	$	364,838

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 March 31, 2010 and September 30, 2009 are as follows:

	LESS THAN 12 MONTHS					OVER 12 MONTHS					TOTAL
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
March 31, 2010

Debt securities
Trust preferred and corporate securities	$	—	$	—		$	17,012	$	(8,798	)	$	17,012	$	(8,798	)
Mortgage-backed securities	206,910		(1,615		)	—		—			206,910		(1,615		)
Total debt securities	$	206,910	$	(1,615	)	$	17,012	$	(8,798	)	$	223,922	$	(10,413	)

	LESS THAN 12 MONTHS					OVER 12 MONTHS					TOTAL
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)			Value		(Losses)
	(Dollars in Thousands)
September 30, 2009

Debt securities
Trust preferred and corporate securities	$	—	$	—		$	15,201	$	(10,604	)	$	15,201	$	(10,604	)
Mortgage-backed securities	17,780		(37		)	10,782		(59		)	28,562		(96		)
Total debt securities	$	17,780	$	(37	)	$	28,348	$	(10,663	)	$	46,128	$	(10,700	)

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NOTE 5. COMMITMENTS AND CONTINGENCIES

At March 31, 2010 and September 30, 2009, the Company had outstanding commitments to originate and purchase loans totaling $39.9 million and $51.8 million, respectively. It is expected that outstanding loan commitments will be funded with existing liquid assets. At March 31, 2010, the Company had commitments to purchase securities available for sale totaling $63.5 million. There were no commitments to sell securities available for sale.

Legal Proceedings

Lawsuits against MetaBank involving the sale of purported MetaBank certificates of deposit continue to be addressed. Since its filing of Form 10-K for the year ended September 30, 2009, the matter of Methodist Hospitals of Dallas v. MetaBank and Meta Financial Group, Inc., filed in the 95th Judicial District Court of Dallas County, TX, Cause No. 08-06994, has been settled for a payment (see below) and the matter dismissed with prejudice. In all, nine cases have been filed to date, and of those nine, two have been dismissed, and three have been settled for payments that the Company deemed reasonable under the circumstances, including the costs of litigation. Of the four remaining cases, two are class action cases. On May 5, 2010, in one of these two cases, Guardian Angel Credit Union v. MetaBank et al., Case No. 08-cv-261-PB (USDC, District of NH), the court granted the plaintiff’s motion to certify the class. The other two cases, not styled as class actions, are cases in which each plaintiff seeks recovery of $99,000 and other specified damages, in connection with a fraudulent CD. This matter was first disclosed in the Company's quarterly report for the period ended December 31, 2007, which stated that an employee of the Bank had sold fraudulent CDs for her own benefit. The unauthorized and illegal actions of the employee have since prompted a number of demands and lawsuits seeking recovery on the bogus CDs to be filed against the Bank, which have been disclosed in subsequent filings. The employee was prosecuted, convicted and is scheduled for sentencing in June, 2010. Notwithstanding the nature of her crimes, which were secreted from the Bank and its management, plaintiffs in the four remaining cases seek to impose liability on the Bank under a number of legal theories with respect to the remaining $3.8 million of bogus CDs that were issued by the former employee. The Bank and its insurer, which has assumed defense of the action and which is advancing defense costs subject to a reservation of rights, continue to vigorously contest liability in the remaining actions.

Cedar Rapids Bank & Trust Company v MetaBank, Case No. LACV007196. In a separate matter, on November 3, 2009, Cedar Rapids Bank & Trust Company (“CRBT”) filed a Petition against MetaBank in the Iowa District Court in and for Linn County claiming an unspecified amount of money damages against MetaBank arising from CRBT’s participation in loans originated by MetaBank to companies owned or controlled by Dan Nelson. The complaint states that the Nelson companies eventually filed for bankruptcy and the loans, including CRBT’s portion, were not fully repaid. Under a variety of theories, CRBT claims that MetaBank had material negative information about Dan Nelson, his companies and the loans that it did not share with CRBT prior to CRBT taking a participation interest in them. MetaBank believes that CRBT’s loss of principal was limited to approximately $200,000, and in any event intends to vigorously defend its actions.

In addition, since the filing of the Company’s Form 10-K for the year ended September 30, 2009, the matter of Parallel Communications, Inc et al v. MetaBank et al., filed in the United States District Court for the Southern District of South Dakota, Docket Number 09-4031, has been settled and the suit will be dismissed shortly.

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 routine litigation to their respective businesses.

NOTE 6. STOCK OPTION PLAN

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

In accordance with ASC 718, compensation 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

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granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock based incentive awards has been negligible.

A summary of option activity for the six months ended March 31, 2010 is presented below:

					Weighted
			Weighted		Average
	Number		Average		Remaining	Aggregate
	of		Exercise		Contractual	Intrinsic
	Shares		Price		Term (Yrs)	Value
	(Dollars in Thousands, Except Share and Per Share Data)

Options outstanding, September 30, 2009	577,921		$	23.74	7.12	$	1,836
Granted	1,000		21.40
Exercised	(20,434	)	15.81
Forfeited or expired	(19,454	)	27.00
Options outstanding, March 31, 2010	539,033		$	23.89	6.64	$	2,231

Options exercisable, March 31, 2010	459,891		$	23.18	6.59	$	2,003

A summary of nonvested share activity for the six months ended March 31, 2010 is presented below:

	Number of		Weighted Average
	Shares		Fair Value at Grant
	(Dollars in Thousands, Except Share and Per Share Data)

Nonvested shares outstanding, September 30, 2009	3,334		$	24.43
Granted	3,600		23.01
Vested	(3,600	)	23.01
Forfeited or expired	—		—
Nonvested shares outstanding, March 31, 2010	3,334		$	24.43

As of March 31, 2010, stock based compensation expense not yet recognized in income totaled $170,000 which is expected to be recognized over a weighted average remaining period of 0.85 years.

NOTE 7. SEGMENT INFORMATION

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met. The Company has determined that it has two reportable segments. The first reportable segment, Traditional Banking, along with the second reportable segment, MPS, comprise the entirety of its banking subsidiary, MetaBank (the “Bank”). The Bank operates as a traditional community bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located. MPS provides a number of products and services to financial institutions and other businesses. These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, credit programs, ACH origination services, gift card programs, rebate programs, travel programs and tax related programs. The remaining grouping under the caption “All Others” consists of the operations of Meta Financial Group, Inc. and Meta Trust Company® and inter-segment eliminations. Transactions between affiliates, the resulting revenues of which are shown in the

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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 six months ended March 31, 2010 and 2009, respectively.

	Traditional			Meta Payment
	Banking			Systems®			All Others			Total

Three Months Ended March 31, 2010
Interest income	$	5,944		$	4,445		$	(6	)	$	10,383
Interest expense	1,132			136			114			1,382
Net interest income (loss)	4,812			4,309			(120		)	9,001
Provision for loan losses	2,000			7,478			—			9,478
Non-interest income	483			37,122			31			37,636
Non-interest expense	5,044			23,587			235			28,866
Income (loss) before tax	(1,749		)	10,366			(324		)	8,293
Income tax expense (benefit)	(673		)	3,903			(111		)	3,119
Net income (loss)	$	(1,076	)	$	6,463		$	(213	)	$	5,174

Inter-segment revenue (expense)	$	2,577		$	(2,577	)	$	—		$	—
Total assets	384,032			596,918			960			981,910
Total deposits	210,725			570,898			(2,247		)	779,376

	Traditional			Meta Payment
	Banking			Systems®			All Others			Total

Three Months Ended March 31, 2009
Interest income	$	7,126		$	3,378		$	29		$	10,533
Interest expense	1,864			271			154			2,289
Net interest income (loss)	5,262			3,107			(125		)	8,244
Provision for loan losses	4,173			6,097			—			10,270
Non-interest income	584			33,009			18			33,611
Non-interest expense	4,781			24,455			414			29,650
Income (loss) before tax	(3,108		)	5,564			(521		)	1,935
Income tax expense (benefit)	(1,167		)	2,092			(165		)	760
Net income (loss)	$	(1,941	)	$	3,472		$	(356	)	$	1,175

Inter-segment revenue (expense)	$	2,203		$	(2,203	)	$	—		$	—
Total assets	384,175			504,704			768			889,647
Total deposits	220,535			466,487			(380		)	686,642

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	Traditional			Meta Payment
	Banking			Systems®			All Others			Total

Six Months Ended March 31, 2010
Interest income	$	11,608		$	7,825		$	14		$	19,447
Interest expense	2,668			216			243			3,127
Net interest income (loss)	8,940			7,609			(229		)	16,320
Provision for loan losses	3,100			11,069			—			14,169
Non-interest income	2,975			56,644			55			59,674
Non-interest expense	9,825			41,443			401			51,669
Income (loss) before tax	(1,010		)	11,741			(575		)	10,156
Income tax expense (benefit)	(389		)	4,377			(198		)	3,790
Net income (loss)	$	(621	)	$	7,364		$	(377	)	$	6,366

Inter-segment revenue (expense)	$	4,952		$	(4,952	)	$	—		$	—
Total assets	384,032			596,918			960			981,910
Total deposits	210,725			570,898			(2,247		)	779,376

	Traditional			Meta Payment
	Banking			Systems®			All Others			Total

Six Months Ended March 31, 2009
Interest income	$	12,997		$	6,205		$	58		$	19,260
Interest expense	3,887			630			338			4,855
Net interest income (loss)	9,110			5,575			(280		)	14,405
Provision for loan losses	5,023			7,376			—			12,399
Non-interest income	972			48,133			41			49,146
Non-interest expense	9,649			37,866			687			48,202
Income (loss) before tax	(4,590		)	8,466			(926		)	2,950
Income tax expense (benefit)	(1,696		)	3,122			(324		)	1,102
Net income (loss)	$	(2,894	)	$	5,344		$	(602	)	$	1,848

Inter-segment revenue (expense)	$	4,076		$	(4,076	)	$	—		$	—
Total assets	384,175			504,704			768			889,647
Total deposits	220,535			466,487			(380		)	686,642

NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued an accounting standard which amends current GAAP related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP. This new accounting standard also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. This accounting standard was subsequently codified into ASC Topic 860, “Accounting for Transfers of Financial Assets”. This accounting standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The adoption of ASC Topic 860 is not anticipated to have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an accounting standard which will require a qualitative rather than quantitative analysis to determine the primary beneficiary of a variable interest entity for consolidation purposes. This accounting standard requires an enterprise to perform an analysis and ongoing reassessments to determine

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whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This accounting standard was subsequently codified into ASC Topic 810, “Improvements for Financial Reporting by Enterprises Involved with Variable Interest Entities”. This accounting standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for all interim reporting periods after that. The adoption of ASC Topic 810 is not anticipated to have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued an accounting standard which requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than a major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances and settlements in the Level 3 recurring measurement reconciliation. Additionally, the standard clarifies that a description of the valuation technique(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. Also, if a valuation technique has changed, entities should disclose that change and the reason for the changes. This accounting standard was subsequently codified into ASC Topic 820, “Improving Disclosures about Fair Value Measurements”. Disclosures other than the gross presentation changes in the Level 3 reconciliation are effective for the first reported period beginning after December 31, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis will be effective for fiscal years beginning after December 15, 2010 and is not anticipated to have a material impact on the Company’s consolidated financial statements.

NOTE 9. FAIR VALUE MEASUREMENTS

Effective October 1, 2008, the Company adopted the provisions of ASC 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and expands disclosures about fair value measurement. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.

The fair value hierarchy is as follows:

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

Level 2 Inputs — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in active markets that are not active and model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 Inputs — Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Securities Available for Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. Level 1 securities include those traded on an active exchange,

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such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government and agency securities that are traded by dealers or brokers in active over-the-counter markets. The Company had no Level 1 securities at March 31, 2010. Level 2 securities include agency mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities.

The following table summarizes the assets of the Company for which fair values are determined on a recurring basis as of March 31, 2010.

	Fair Value at March 31, 2010
(Dollars in Thousands)	Total		Level 1		Level 2		Level 3

Securities available for sale	$	503,282	$	—	$	503,282	$	—

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

At March 31, 2010

					Unrealized			S&P	Moody
Issuer(1)	Book Value		Fair Value		(Loss)			Credit Rating	Credit Rating
	(Dollars in Thousands)

Key Corp. Capital I	$	4,980	$	3,319	$	(1,661	)	BB	Baa3
Huntington Capital Trust II SE	4,970		2,764		(2,206		)	B	Ba1
Bank Boston Capital Trust IV (2)	4,961		3,441		(1,520		)	BB	Baa3
Bank America Capital III	4,949		3,438		(1,511		)	BB	Baa3
PNC Capital Trust	4,950		3,800		(1,150		)	BBB