UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

☐  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)

(605) 782-1767

(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 ☒  NO☐

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

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

Large accelerated filer☐ Accelerated filer☒ Non-accelerated filer☐ Smaller Reporting Company☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ YES  ☒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 2, 2016:
Common Stock, $.01 par value	8,504,034 Common Shares
Nonvoting Common Stock, $.01 par value	0 Common Shares

META FINANCIAL GROUP, INC.

FORM 10-Q

Table of Contents

PART I - FINANCIAL INFORMATION		2
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Statements of Financial Condition as of March 31, 2016 and September 30, 2015	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2016 and 2015	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2016 and 2015	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	52
Item 4.	Controls and Procedures	58
PART II - OTHER INFORMATION		60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
SIGNATURES		63

i

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	March 31, 2016		September 30, 2015
Cash and cash equivalents	$	39,480	$	27,658
Investment securities available for sale		866,152		679,504
Mortgage-backed securities available for sale		688,952		576,583
Investment securities held to maturity		417,271		279,167
Mortgage-backed securities held to maturity		68,497		66,577
Loans receivable - net of allowance for loan losses of $7,431 at March 31, 2016 and $6,255 at September 30, 2015		777,451		706,255
Federal Home Loan Bank Stock, at cost		22,431		24,410
Accrued interest receivable		15,783		13,352
Premises, furniture, and equipment, net		18,212		17,393
Bank-owned life insurance		56,584		45,830
Goodwill		36,928		36,928
Intangible assets		31,272		33,577
Prepaid assets		10,014		9,360
Deferred taxes		787		6,997
Meta Payment Systems accounts receivable		6,235		5,337
Other assets		15,693		777
Total assets	$	3,071,742	$	2,529,705
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing checking	$	2,013,783	$	1,449,101
Interest-bearing checking		37,469		33,320
Savings deposits		73,357		41,720
Money market deposits		44,351		42,222
Time certificates of deposit		51,801		91,171
Total deposits		2,220,761		1,657,534
Advances from Federal Home Loan Bank		7,000		7,000
Federal funds purchased		465,000		540,000
Securities sold under agreements to repurchase		1,626		4,007
Subordinated debentures		10,310		10,310
Capital lease		2,081		2,143
Accrued interest payable		167		272
Contingent liability		431		331
Accrued expenses and other liabilities		51,079		36,773
Total liabilities		2,758,455		2,258,370
STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at March 31, 2016 and September 30, 2015, respectively		-		-
Common stock, $.01 par value; 15,000,000 shares authorized, 8,501,077 shares issued and outstanding at March 31, 2016 and 8,183,272 shares issued and 8,163,022 shares outstanding at September 30, 2015		85		82
Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized,no shares issued or outstanding at March 31, 2016 and September 30, 2015, respectively		-		-
Additional paid-in capital		184,347		170,749
Retained earnings		114,526		98,359
Accumulated other comprehensive income (loss)		14,329		2,455
Treasury stock, at cost, no common shares at March 31, 2016 and 20,250 common shares at September 30, 2015		-		(310	)
Total stockholders’ equity		313,287		271,335
Total liabilities and stockholders’ equity	$	3,071,742	$	2,529,705

See Notes to Condensed Consolidated Financial Statements.

2

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended March 31,					Six Months Ended March 31,
	2016			2015		2016		2015
Interest and dividend income:
Loans receivable, including fees	$	8,548		$	7,637	$	16,867	$	14,033
Mortgage-backed securities		4,768			3,919		8,481		7,743
Other investments		7,313			4,203		13,556		8,215
		20,629			15,759		38,904		29,991
Interest expense:
Deposits		135			172		298		404
FHLB advances and other borrowings		556			301		1,113		730
		691			473		1,411		1,134
Net interest income		19,938			15,286		37,493		28,857
Provision (recovery) for loan losses		1,173			593		1,959		641
Net interest income after provision for loan losses		18,765			14,693		35,534		28,216
Non-interest income:
Tax product fees		19,638			-		19,638		-
Card fees		18,579			13,663		33,835		26,752
Loan fees		2,216			813		3,035		1,127
Bank-owned life insurance		380			280		754		566
Deposit fees		151			141		313		297
Gain (loss) on sale of securities available for sale, net (Includes $29 and $50 reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the threeand six months ended March 31, 2016, respectively)		29			17		50		(1,243	)
Gain (loss) on foreclosed real estate		-			2		-		28
Other income (loss)		(92	)		54		110		117
Total non-interest income		40,901			14,970		57,735		27,644
Non-interest expense:
Compensation and benefits		17,110			11,668		31,765		22,199
Tax product expense		8,256			-		8,256		-
Card processing		6,017			3,810		11,251		8,506
Occupancy and equipment		3,659			2,835		7,038		5,438
Legal and consulting		859			996		1,990		2,217
Marketing		539			341		1,041		645
Data processing		357			331		698		681
Other expense		4,993			3,439		9,759		6,147
Total non-interest expense		41,790			23,420		71,798		45,833
Income before income tax expense		17,876			6,243		21,471		10,027
Income tax expense (Includes $11 and $18 income tax expense reclassified from accumulated other comprehensive income (loss) for the three and six months ended March 31, 2016, respectively)		3,593			1,062		3,130		1,251
Net income	$	14,283		$	5,181	$	18,341	$	8,776
Earnings per common share:
Basic	$	1.69		$	0.79	$	2.20	$	1.38
Diluted	$	1.68		$	0.78	$	2.18	$	1.37

See Notes to Condensed Consolidated Financial Statements.

3

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,						Six Months Ended March 31,
	2016			2015			2016			2015
Net income	$	14,283		$	5,181		$	18,341		$	8,776
Other comprehensive income (loss):
Change in net unrealized gain (loss) on securities		16,216			5,940			18,837			12,452
Losses (gains) realized in net income		(29	)		(17	)		(50	)		1,243
		16,187			5,923			18,787			13,695
Deferred income tax effect		5,938			2,189			6,913			5,024
Total other comprehensive income (loss)		10,249			3,734			11,874			8,671
Total comprehensive income (loss)	$	24,532		$	8,915		$	30,215		$	17,447

See Notes to Condensed Consolidated Financial Statements.

4

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the Six Months Ended March 31, 2016 and 2015

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

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance, September 30, 2014	$	62	$	95,079	$	83,797		$	(3,409	)	$	(727	)	$	174,802
Cash dividends declared on common stock ($0.26 per share)		-		-		(1,686	)		-			-			(1,686	)
Issuance of common shares from the sales of equity securities		8		25,282		-			-			-			25,290
Issuance of common shares due to issuance of stock options, restricted stock and ESOP		-		176		-			-			417			593
Net change in unrealized losses on securities, net of income taxes		-		-		-			8,671			-			8,671
Net income		-		-		8,776			-			-			8,776
Balance, March 31, 2015	$	70	$	120,537	$	90,887		$	5,262		$	(310	)	$	216,446
Balance, September 30, 2015	$	82	$	170,749	$	98,359		$	2,455		$	(310	)	$	271,335
Cash dividends declared on common stock ($0.26 per share)		-		-		(2,174	)		-			-			(2,174	)
Issuance of common shares from the sales of equity securities		2		11,520		-			-			-			11,522
Issuance of common shares due to issuance of stock options, restricted stock and ESOP		1		1,412		-			-			310			1,723
Stock compensation		-		666		-			-			-			666
Net change in unrealized gains on securities, net of income taxes		-		-		-			11,874			-			11,874
Net income		-		-		18,341			-			-			18,341
Balance, March 31, 2016	$	85	$	184,347	$	114,526		$	14,329		$	-		$	313,287

See Notes to Condensed Consolidated Financial Statements.

5

META FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Six Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	18,341		$	8,776
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net		17,569			12,097
Provision (recovery) for loan losses		1,959			641
Provision (recovery) for deferred taxes		(703	)		(1,236	)
(Gain) loss on other assets		10			(646	)
(Gain) loss on sale of securities available for sale, net		(50	)		1,243
Capital lease obligations interest expense		(63	)		(66	)
Net change in accrued interest receivable		(2,431	)		(1,245	)
Change in bank-owned life insurance value		(754	)		(565	)
Net change in other assets		(6,092	)		619
Net change in accrued interest payable		(105	)		(157	)
Net change in accrued expenses and other liabilities		14,454			19,432
Net cash provided by (used in) operating activities		42,135			38,893
Cash flows from investing activities:
Purchase of securities available-for-sale		(454,450	)		(376,357	)
Proceeds from sales of securities available-for-sale		100,298			264,631
Proceeds from maturities and principal repayments of securities available-for-sale		52,991			53,414
Purchase of securities held to maturity		(147,906	)		(33,526	)
Proceeds from maturities and principal repayments of securities held to maturity		6,059			4,078
Purchase of bank owned life insurance		(10,000	)		-
Loans sold		88			(5,472	)
Net change in loans receivable		(73,243	)		(46,786	)
Proceeds from sales of foreclosed real estate		-			43
Net cash paid for acquisition		-			(92,308	)
Federal Home Loan Bank stock purchases		(403,981	)		(215,085	)
Federal Home Loan Bank stock redemptions		405,960			223,080
Proceeds from the sale of premises and equipment		13			2,096
Purchase of premises and equipment		(3,663	)		(2,148	)
Net cash provided by (used in) investing activities		(527,834	)		(224,340	)
Cash flows from financing activities:
Net change in checking, savings, and money market deposits		602,597			437,012
Net change in time deposits		(39,370	)		(72,881	)
Net change in federal funds		(75,000	)		(209,000	)
Net change in securities sold under agreements to repurchase		(2,381	)		1,226
Principal payments on capital lease obligations		(62	)		(56	)
Cash dividends paid		(2,174	)		(1,686	)
Stock compensation		666			-
Proceeds from issuance of common stock		13,245			25,883
Net cash provided by (used in) financing activities		497,521			180,498
Net change in cash and cash equivalents		11,822			(4,949	)
Cash and cash equivalents at beginning of period		27,658			29,832
Cash and cash equivalents at end of period	$	39,480		$	24,883
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	1,516		$	1,292
Income taxes		1,789			3,120
Franchise taxes		39			39
Other taxes		58			41
Supplemental schedule of non-cash investing activities:
Sale of available-for-sale securities accrued	$	10,499		$	-
Capital lease obligation		-			2,259
Securities transferred from available for sale to held to maturity		-			310

See Notes to Condensed Consolidated Financial Statements.

6

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, 2015 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 14, 2015.  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 six month period ended March 31, 2016, are not necessarily indicative of the results expected for the year ending September 30, 2016.

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 appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.  While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.

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

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 premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, manufactured homes, home equity and second mortgage loans, and tax product 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 210 days or more for premium finance loans and 90 days or more for other loan categories.  Non-accrual loans and all troubled debt restructurings are considered impaired.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

7

Loans receivable at March 31, 2016 and September 30, 2015 are as follows:

	March 31, 2016			September 30, 2015
	(Dollars in Thousands)
1-4 Family Real Estate	$	140,000		$	125,021
Commercial and Multi-Family Real Estate		354,794			310,199
Agricultural Real Estate		64,111			64,316
Consumer		35,937			33,527
Commercial Operating		26,909			29,893
Agricultural Operating		42,081			43,626
Premium Finance		121,572			106,505
Total Loans Receivable		785,404			713,087
Less:
Allowance for Loan Losses		(7,431	)		(6,255	)
Net Deferred Loan Origination Fees		(522	)		(577	)
Total Loans Receivable, Net	$	777,451		$	706,255

Activity in the allowance for loan losses and balances of loans receivable by portfolio segment for the three and six month periods ended March 31, 2016 and 2015 is as follows:

	1-4 Family Real Estate		Commercial and Multi-Family Real Estate			Agricultural Real Estate			Consumer		Commercial Operating			Agricultural Operating			Premium Finance			Unallocated			Total
	(Dollars in Thousands)
Three Months Ended March 31, 2016
Allowance for loan losses:
Beginning balance	$	285	$	1,194		$	171		$	20	$	107		$	3,856		$	424		$	609		$	6,666
Provision (recovery) for loan losses		42		790			(17	)		1,039		(62	)		(529	)		171			(261	)		1,173
Charge offs		-		(290	)		-			-		-			-			(137	)		-			(427	)
Recoveries		-		-			-			-		-			-			19			-			19
Ending balance	$	327	$	1,694		$	154		$	1,059	$	45		$	3,327		$	477		$	348		$	7,431
Six Months Ended March 31, 2016
Allowance for loan losses:
Beginning balance	$	278	$	1,187		$	163		$	20	$	28		$	3,537		$	293		$	749		$	6,255
Provision (recovery) for loan losses		49		797			(9	)		1,039		17			(210	)		677			(401	)		1,959
Charge offs		-		(290	)		-			-		-			-			(527	)		-			(817	)
Recoveries		-		-			-			-		-			-			34			-			34
Ending balance	$	327	$	1,694		$	154		$	1,059	$	45		$	3,327		$	477		$	348		$	7,431
Ending balance: individually evaluated for impairment		-		40			-			-		-			2,846			-			-			2,886
Ending balance: collectively evaluated for impairment		327		1,654			154			1,059		45			481			477			348			4,545
Total	$	327	$	1,694		$	154		$	1,059	$	45		$	3,327		$	477		$	348		$	7,431
Loans:
Ending balance: individually evaluated for impairment		114		1,091			-			-		6			3,421			-			-			4,632
Ending balance: collectively evaluated for impairment		139,886		353,703			64,111			35,937		26,903			38,660			121,572			-			780,772
Total	$	140,000	$	354,794		$	64,111		$	35,937	$	26,909		$	42,081		$	121,572		$	-		$	785,404

8

	1-4 Family Real Estate			Commercial and Multi-Family Real Estate			Agricultural Real Estate			Consumer		Commercial Operating		Agricultural Operating			Premium Finance			Unallocated		Total
	(Dollars in Thousands)
Three Months Ended March 31, 2015
Allowance for loan losses:
Beginning balance	$	512		$	1,198		$	266		$	78	$	85	$	630		$	35		$	2,421	$	5,225
Provision (recovery) for loan losses		55			20			(1	)		-		14		37			192			276		593
Charge offs		(45	)		-			-			-		-		-			(81	)		-		(126	)
Recoveries		-			-			-			-		2		-			22			-		24
Ending balance	$	522		$	1,218		$	265		$	78	$	101	$	667		$	168		$	2,697	$	5,716
Six Months Ended March 31, 2015
Allowance for loan losses:
Beginning balance	$	552		$	1,575		$	263		$	78	$	93	$	719		$	-		$	2,117	$	5,397
Provision (recovery) for loan losses		15			(149	)		2			-		5		(52	)		240			580		641
Charge offs		(45	)		(214	)		-			-		-		-			(98	)		-		(357	)
Recoveries		-			6			-			-		3		-			26			-		35
Ending balance	$	522		$	1,218		$	265		$	78	$	101	$	667		$	168		$	2,697	$	5,716
Ending balance: individually evaluated for impairment		-			296			-			1		-		326			-			-		623
Ending balance: collectively evaluated for impairment		522			922			265			77		101		341			168			2,697		5,093
Total	$	522		$	1,218		$	265		$	78	$	101	$	667		$	168		$	2,697	$	5,716
Loans:
Ending balance: individually evaluated for impairment		181			1,410			-			1		16		6,134			-			-		7,742
Ending balance: collectively evaluated for impairment		115,560			259,127			65,720			30,534		27,250		35,615			83,191			-		616,997
Total	$	115,741		$	260,537		$	65,720		$	30,535	$	27,266	$	41,749		$	83,191		$	-	$	624,739

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 have well-defined weaknesses creating a distinct possibility that 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.

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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 March 31, 2016 and September 30, 2015 are as follows:

March 31, 2016	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Premium Finance		Total
	(Dollars in Thousands)
Pass	$	138,882	$	352,195	$	37,627	$	35,817	$	26,245	$	25,232	$	121,572	$	737,570
Watch		1,087		1,992		-		-		573		441		-		4,093
Special Mention		9		-		24,645		120		-		3,173		-		27,947
Substandard		22		607		1,839		-		91		10,389		-		12,948
Doubtful		-		-		-		-		-		2,846		-		2,846
	$	140,000	$	354,794	$	64,111	$	35,937	$	26,909	$	42,081	$	121,572	$	785,404

September 30, 2015	1-4 Family Real Estate		Commercial and Multi-Family Real Estate		Agricultural Real Estate		Consumer		Commercial Operating		Agricultural Operating		Premium Finance		Total
	(Dollars in Thousands)
Pass	$	124,775	$	307,876	$	35,106	$	33,527	$	29,052	$	29,336	$	106,505	$	666,177
Watch		212		1,419		26,703		-		712		1,079		-		30,125
Special Mention		10		-		877		-		-		4,014		-		4,901
Substandard		24		904		1,630		-		129		9,197		-		11,884
Doubtful		-		-		-		-		-		-		-		-
	$	125,021	$	310,199	$	64,316	$	33,527	$	29,893	$	43,626	$	106,505	$	713,087

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.

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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.

Due to consumer demand, the Company 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.  The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.

The Company also currently offers five- and ten-year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, 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.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into fixed-rate loans.  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.

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 and the West.

The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by 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 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.

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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, but 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 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 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.

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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 may include 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”).  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, MPS designs and administers certain credit programs that seek to accomplish these objectives.  The MPS Credit Committee, consisting of members of Executive Management of the Company, 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.

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 to provide unique and innovative lending solutions to the unbanked and under-banked segment.

The largest component of MPS’s consumer loan portfolio consists of taxpayer advances.  These advances are available to eligible customers of our Refund Advantage Electronic Return Originators (“EROs”) and Liberty Tax franchisees.  The product is offered with no incremental fees or interest charges to the borrower (with the tax preparer paying applicable fees) and repayments are contingent upon receipt of future tax refunds.  This solution provides our network of over 10,000 EROs and Liberty Tax franchisees with an opportunity to attract new clients to their current customer base.

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 has strived to employ policies, procedures and information systems that it believes commensurate with the added risk and exposure.

Commercial Operating Lending.  The 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, and operating costs for the Company’s network of tax Electronic Return Originators (“EROs”).  Commercial loans also may 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.  ERO loans are not collateralized.  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.

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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.

Premium Finance Lending.  Through its AFS/IBEX division, MetaBank provides short-term, primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as insurance premium financing.  This includes, but is not limited to, policies for commercial property, casualty and liability risk.  The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation.

Insurance premium financing is the business of extending credit to a policyholder to pay for insurance premiums when the insurance carrier requires payment in full at inception of coverage.  Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term.  The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to ten months on average.  The down payment is set such that if the policy is cancelled, the unearned premium is typically sufficient to cover the loan balance and accrued interest.

Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-180 days to convert the collateral into cash.  In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy and establish a first position lien on the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should typically be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium.  Generally, when a premium finance loan becomes delinquent for 210 days or more, or when collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance.

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Past due loans at March 31, 2016 and September 30, 2015 are as follows:

March 31, 2016	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Non-Accrual Loans		Total Loans Receivable
	(Dollars in Thousands)
1-4 Family Real Estate	$	16	$	56	$	-	$	72	$	139,906	$	22	$	140,000
Commercial and Multi-Family Real Estate		3,718		-		-		3,718		350,469		607		354,794
Agricultural Real Estate		-		-		-		-		64,111		-		64,111
Consumer		347		17		5		369		35,568		-		35,937
Commercial Operating		1,482		-		-		1,482		25,427		-		26,909
Agricultural Operating		-		-		-		-		38,660		3,421		42,081
Premium Finance		1,361		438		611		2,410		119,162		-		121,572
Total	$	6,924	$	511	$	616	$	8,051	$	773,303	$	4,050	$	785,404

September 30, 2015	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Non-Accrual Loans		Total Loans Receivable
	(Dollars in Thousands)
1-4 Family Real Estate	$	142	$	-	$	-	$	142	$	124,855	$	24	$	125,021
Commercial and Multi-Family Real Estate		-		-		-		-		309,295		904		310,199
Agricultural Real Estate		-		-		-		-		64,316		-		64,316
Consumer		152		-		13		165		33,362		-		33,527
Commercial Operating		-		-		-		-		29,893		-		29,893
Agricultural Operating		-		-		-		-		38,494		5,132		43,626
Premium Finance		702		362		1,728		2,792		103,713		-		106,505
Total	$	996	$	362	$	1,741	$	3,099	$	703,928	$	6,060	$	713,087

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 210 days or more for premium finance loans and 90 days or more for other loan categories.  As of March 31, 2016, there were no Premium Finance loans greater than 210 days past due.

Impaired loans at March 31, 2016 and September 30, 2015 are as follows:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance
March 31, 2016	(Dollars in Thousands)
Loans without a specific valuation allowance
1-4 Family Real Estate	$	114	$	114	$	-
Commercial and Multi-Family Real Estate		439		439		-
Commercial Operating		6		6		-
Total	$	559	$	559	$	-
Loans with a specific valuation allowance
Commercial and Multi-Family Real Estate	$	652	$	942	$	40
Agricultural Operating		3,421		3,571		2,846
Total	$	4,073	$	4,513	$	2,886

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	Recorded Balance		Unpaid Principal Balance		Specific Allowance
September 30, 2015	(Dollars in Thousands)
Loans without a specific valuation allowance
1-4 Family Real Estate	$	121	$	121	$	-
Commercial and Multi-Family Real Estate		446		446		-
Commercial Operating		11		11		-
Total	$	578	$	578	$	-
Loans with a specific valuation allowance
Commercial and Multi-Family Real Estate	$	904	$	904	$	241
Agricultural Operating		5,132		5,282		3,252
Total	$	6,036	$	6,186	$	3,493

The following table provides the average recorded investment in impaired loans for the three and six month periods ended March 31, 2016 and 2015.

	Three Months Ended March 31,				Six Months Ended March 31,
	2016		2015		2016		2015
	Average Recorded Investment		Average Recorded Investment		Average Recorded Investment		Average Recorded Investment
	(Dollars in Thousands)
1-4 Family Real Estate	$	116	$	292	$	118	$	333
Commercial and Multi-Family Real Estate		1,257		1,421		1,302		2,834
Agricultural Real Estate		-		-		-		-
Consumer		-		-		-		-
Commercial Operating		7		19		8		20
Agricultural Operating		4,362		2,242		4,697		1,284
Premium Finance		-		-		-		-
Total	$	5,742	$	3,974	$	6,125	$	4,471

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 six month periods ended March 31, 2016 and 2015.  Additionally, there were no TDR loans for which there was a payment default during the three and six month periods ended March 31, 2016 and 2015 that had been modified during the 12-month period prior to the default.

NOTE 3. ALLOWANCE FOR LOAN LOSSES

At March 31, 2016, the Company’s allowance for loan losses was $7.4 million, an increase of $1.1 million from $6.3 million at September 30, 2015.  During the six months ended March 31, 2016, the Company recorded a provision for loan losses of $2.0 million, primarily due to loan growth. In addition, the Company had $0.8 million of net charge offs for the six months ended March 31, 2016, compared to $0.3 million for the six months ended March 31, 2015.

The allowance for loan losses is established through the 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 appropriate loan loss allowance.

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Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan losses.  The current economic environment continues to show signs of improvement in the Bank’s markets.  The Bank’s loss rates over the past five years were very low.  Notwithstanding these signs of improvement, the Bank does not believe it is likely these low loss conditions will continue indefinitely.  Although the Bank’s four market areas have indirectly benefitted from a stable agricultural market, the market has become somewhat more stressed with lower commodity prices over the last couple of years and commodity prices remain lower than a few years ago.  Loss rates in the agricultural real estate and agricultural operating loan portfolios have been minimal in the past five years.  Management expects that future losses in this portfolio could be higher than recent historical experience.  Management believes the low commodity prices and high land rents have the potential to negatively impact the economies of our agricultural markets.

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 March 31, 2016, reflects an appropriate allowance against probable losses from the loan portfolio.  Although the Company maintains its allowance for loan losses at a level it considers to be appropriate, 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 the OCC, which can require the establishment of additional general or specific allowances.

Real estate properties acquired through foreclosure are recorded at fair value.  If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged to the allowance for loan losses at the time of transfer.  Valuations are periodically updated by management and, if the value declines, a specific provision for losses on such property is established by a charge to operations.

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 March 31, 2016 and September 30, 2015.  Diluted EPS shows the dilutive effect of additional common shares issuable pursuant to stock option agreements.

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A reconciliation of net income and common stock share amounts used in the computation of basic and diluted EPS for the three and six months ended March 31, 2016 and 2015 is presented below.

Three Months Ended March 31,