Pathward Financial
Annual Report 2005

Plain-text annual report

2 0 0 5 A N N U A L R E P O R T for every life change For every life change Customers don’t change banks every day. And they shouldn’t. But when “real life” changes, it is just smart to make sure their financial life changes with it. In fact, we think it makes so much sense that we offer a unique Life Change ProgramSM to both individual and business customers. Life Change SpecialistsSM utilize detailed checklists and financial know-how to coach them through the personal and financial challenges of the most common life changes ... so Meta customers can spend more time enjoying life. COMPANY STRUCTURE META FINANCIAL GROUP, INC. META TRUST METABANK METABANK WEST CENTRAL NORTHWEST IOWA MARKET BROOKINGS MARKET CENTRAL IOWA MARKET SIOUX EMPIRE MARKET META PAYMENT SYSTEMS COMPANY PROFILE Meta Financial Group, Inc. is a $776 million bank holding company for MetaBank is a federally-chartered savings bank with four market MetaBank, MetaBank West Central and Meta Trust Company. Headquartered areas: Northwest Iowa, Brookings, Central Iowa, Sioux Empire; and the in Storm Lake, Iowa, the Company converted from mutual ownership to nationally recognized Meta Payment Systems division. Meta Payment stock ownership in 1993. Its primary business is marketing deposits, Systems manages four primary business lines that contribute to revenue loans and other financial services and products to meet the needs of its and deposits: prepaid cards, credit cards, Automated Teller Machine (ATM) commercial, agricultural, and retail customers. sponsorship and Automated Clearing House (ACH) origination. MetaBank Meta Financial Group operates under a super-community banking West Central is a state-chartered commercial bank located in West Central philosophy that allows the Company to grow while maintaining its Iowa. Eighteen bank offices support customers throughout central and community bank roots, with local decision making and customer service. northwest Iowa and in Brookings and Sioux Falls, South Dakota. Meta Trust Administrative functions, transparent to the customer, are centralized to provides professional trust services to bank customers. enhance the banks’ operational efficiencies and to improve customer The Company is affiliated with Bill Markve and Associates to offer a service capabilities. wide range of non-insured investment and insurance products to customers through Ameritas Investment Corporation and other companies. Banks are Members FDIC and Equal Housing Lenders. As of September 30, 2005, the company and its subsidiary banks had capital ratios in excess of regulatory requirements and are considered well capitalized under regulatory guidelines. CONTENTS Company Structure & Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Directors & Senior Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii-iii Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-34 Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 i To Our Shareholders Earnings for 2005 were disappoint- since the beginning of MFG’s period ended September 30, 2004, ing for Meta Financial Group (MFG). fourth fiscal quarter. During the and net income of $1.49 per dilut- The Company reported a net loss fourth quarter, MFG incurred ed share, excluding the profit from of $924 thousand or negative costs related to the liquidation the branch sale, for the year ended $0.38 per diluted share for the totaling approximately $330 September 30, 2004. While exclud- fiscal year ended September 30, thousand, or $218 thousand ing the impact of the above items 2005. This compares to net income net of tax. These costs reduced is a non-GAAP measure, we believe of $4.0 million or $1.57 per diluted earnings by approximately $0.09 that it may be useful to provide share for fiscal year 2004. Boosting per share for both the quarter such information due to the nature the 2004 fiscal year’s results was a and the 2005 fiscal year. Please of the expenses in order to more branch sale net gain, after income consult Management’s Discussion accurately compare the results of taxes, of $699 thousand or $0.28 and Analysis later in this annual the periods presented. per diluted share. report for further information. At September 30, 2005, non- For the quarter ended Excluding the impact of the performing assets totaled $5.4 September 30, 2005, the Company additional provision for loan million ($4.7 million of which is recorded net income of $546 thou- losses, the associated liquidation associated with the credit discussed sand or $0.22 per diluted share. costs, the start-up costs for Meta previously) and the ratio of non- Compared to net income of $498 Payment Systems, and the costs performing assets to total assets thousand or $0.20 per diluted share for same quarter the previ- ous year, fourth quarter earnings increased $48 thousand or 9.6 percent from 2004 to 2005. A $4.8 million additional provision for loan losses during the third quarter ended June 30, 2005 was the primary cause for the fiscal 2005 loss. After income taxes, the additional provision reduced earnings by $1.25 per diluted share for the fiscal year. The additional provision for Even though MetaBank, a wholly owned subsidiary of Meta Financial Group Inc., didn’t enter the prepaid card business until May 2004 with the creation of its Meta Payment Systems division, the company has become one of the premier financial institutions in the prepaid arena.1 loan losses related to $9.8 million related to the Company’s name was 0.69 percent. This compares to of loans, which was the Company’s change, net income would have $729 thousand and 0.09 percent at share of approximately $32.0 mil- been $705 thousand or $0.28 per September 30, 2004. The Company lion of total loans to three affiliated diluted share for the fourth quarter, had $1.91 million of 30-day past companies involved in automobile and $3.7 million or $1.46 per due loans, or 0.43 percent of total sales, service and financing, and diluted share for the year ended loans, as of September 30, 2005. to the owners thereof. September 30, 2005. This com- This compares to $1.89 million of Liquidation of all three compa- pares to net income of $0.34 per 30-day past due loans, or 0.45 per- nies’ assets has been underway diluted share for the three-month cent of total loans the previous year. ii L TO R: J. TYLER HAAHR, JAMES S. HAAHR “You’ve just gotta take care of the people” is the simple credo our company was founded upon more than half a century ago. It is still the cornerstone of our business philosophy today, and is the heart of our mission to make money management easy through every life change. While 2005 did not prove to Net interest income grew The Company also proceeded officer of MFG and MetaBank. be a good earnings year for MFG, $1.47 million or 8.3 percent for the with previously disclosed plans to James S. Haahr, who has worked progress was made toward initiatives year ended September 30, 2005. open two additional branch offices in for the Company since 1961, most that we believe will enhance long- In addition to strong low-cost Sioux Falls, South Dakota. The third recently as chairman and CEO, term performance and earnings: deposit balance growth, total loans and fourth full-service retail bank continues to serve as chairman of 1. Growth of low-cost deposits and increased $36.1 million or 8.9 per- offices opened in August and October the board. Troy Moore, president commercial loans; cent during fiscal 2005. Originated respectively. The newest facility of MetaBank’s central Iowa market, 2. Growth of Meta Payment Systems, commercial real estate and operat- houses retail bank activities and the was named executive vice presi- a division of MetaBank; ing loans increased by $45.3 million, Meta Payment Systems division. dent, chief operating officer and 3. Branch expansion; and or 21.8 percent during the fiscal 4. The name change completion. year. This follows 19.3 percent and 43.5 percent increases in 2004 and Low-cost deposit balances 2003 respectively. As the volume (checking, money market, and savings of originated commercial loans accounts) grew $75.8 million or 38.5 increases, the Company benefits percent while total deposit balances with the related deposit accounts, grew $79.2 million or 17.2 percent better loan-to-deposit spreads, less It is not a coincidence that Meta means change. member of the executive committee for MFG and MetaBank. Gene Richardson, who serves as MetaBank West Central’s market president also assumed responsi- bilities as MetaBank’s central Iowa market president. On October 25, 2005 Brad in 2005. The Company’s focus to interest rate sensitivity, and more In January 2005, the Company Hanson was elected to the board increase low-cost deposits has pro- fee income. and its subsidiaries united under of directors for MFG, MetaBank, duced a $194 million gain or a 247.1 Since its inception in May one name. During the fiscal year, MetaBank West Central and Meta percent increase in low-cost deposit 2004, MetaBank, through its Meta one-time costs related to the name Trust. In addition, Mr. Hanson was balances and a $222 million gain or a Payment Systems (MPS) division, changes, net of income taxes, appointed executive vice president 70.0 percent increase in total deposit has become one of the premier totaled $428 thousand or $0.17 per and member of the executive com- balances over the past five years. financial institutions in the prepaid diluted share. The Company expects mittee for MFG and MetaBank. He Meta Financial Group’s commit- arena.1 It serves banks, card proces- to recoup one-time expenses within also serves as president of Meta ment to attract low-cost deposits sors, and third-party marketing the next fiscal year as a result of Payment Systems and is a pioneer has shifted the percentage of low- companies nationwide. The MPS improved operating and marketing in the payment systems industry. cost funds from 26.8 percent of total group launched and now manages efficiencies associated with the On behalf of all Meta Financial deposits to 50.4 percent between four primary business lines that name change. Group associates, we remain dedi- the end of fiscal 2001 and fiscal contribute to the Company’s revenue It is not a coincidence that cated to increasing shareholder 2005. The shift directly improves and deposits: prepaid cards, credit Meta means change. MetaBank’s value and enhancing your return. loan-to-deposit interest rate spreads cards, Automated Teller Machine mission is to make money manage- Thank you for investing in our and enhances the Company’s net (ATM) sponsorship, and Automated ment easy for customers through company. interest income. Clearing House (ACH) origination. every life change. To support the LOW-COST DEPOSIT BALANCES In millions 05 04 03 02 01 $273 $197 $137 $102 $91 LOW-COST DEPOSIT BALANCES As a percentage of total deposit balances 05 04 03 02 01 50% 43% 31% 29% 27% MPS expands the Company’s mission, the Company initiated opportunity and reach in the grow- a unique Life Change ProgramSM ing payments industry. Start up designed to coach customers— costs associated with MPS resulted both individual and business— in a net loss of $808 thousand or through the ten most common life $0.32 per diluted share for the year changes. More than 50 percent of ended September 30, 2005. This employees are trained Life Change JAMES S. HAAHR Chairman of the Board follows a net loss of $490 thousand Specialists.SM The customer-focused or $0.20 per diluted share for the program is just one way MetaBank J. TYLER HAAHR President & CEO previous fiscal year. As the Company differentiates itself as it builds anticipated and ahead of original stronger customer relationships projections, MPS, which operates and a stronger brand. as a separate business segment, On June 28, 2005 MFG recorded its first profitable quarter announced that J. Tyler Haahr, with net income of $59 thousand who had served as president and or $0.02 per diluted share in the chief operating officer, was named fourth quarter of fiscal 2005. president and chief executive iii (1) Cullen, Scott. “Banking on Prepaid—Those making a successful transition do so by picking the right partners,” Intele-Card News, September 1, 2005. FINANCIAL HIGHLIGHTS (Dollars in Thousands except Per Share Data) AT SEPTEMBER 30 2005 2004 2003 2002 2001 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 776,349 $ 780,799 $ 772,285 $ 607,648 $ 523,183 Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440,190 540,770 42,959 404,051 461,581 47,274 349,692 435,553 43,031 341,937 355,780 44,588 333,062 338,782 43,727 Book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.16 $ 18.98 $ 17.25 $ 18.06 $ 17.71 Total equity to assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.53% 6.05% 5.57% 7.34% 8.36% FOR THE FISCAL YEAR Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,239 $ 17,769 $ 15,728 $ 13,700 $ 12,833 Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (924) Diluted earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.38) $ Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net yield on interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.12% -2.05% 2.56% 3,987 1.57 .51% 8.69% 2.40% $ 3,397 1.36 .47% 7.57% 2.31% $ 2,157 0.87 .38% 4.95% 2.56% $ 1,910 0.78 .37% 4.57% 2.59% TOTAL ASSETS In millions TOTAL LOANS, NET In millions TOTAL DEPOSITS In millions 05 04 03 02 01 $776 $781 $772 $608 $523 05 04 03 02 01 $440 $404 $350 $342 $333 05 04 03 02 01 $541 $462 $436 $356 $339 FINANCIAL CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consolidated Balance Sheets at September 30, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Consolidated Statements of Operations for the Years Ended September 30, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended September 30, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . 15 Consolidated Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1 Meta Financial Group, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL INFORMATION SEPTEMBER 30, 2005 2004 2003 2002 2001 SELECTED FINANCIAL CONDITION DATA (In Thousands) Total assets Loans receivable, net Securities available for sale Excess of cost over net assets acquired, net Deposits Total borrowings Shareholders’ equity YEAR ENDED SEPTEMBER 30, SELECTED OPERATIONS DATA (In Thousands, Except Per Share Data) Total interest income Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Total noninterest income Total noninterest expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Earnings (loss) per common and common equivalent share: Basic earnings (loss) per share Diluted earnings (loss) per share YEAR ENDED SEPTEMBER 30, SELECTED FINANCIAL RATIOS AND OTHER DATA PERFORMANCE RATIOS Return on average assets Return on average shareholders’ equity Interest rate spread information: Average during the year End of year Net yield on average interest-earning assets Ratio of operating expense to average total assets QUALITY RATIOS $ $ $ $ $ 776,349 440,190 230,893 3,403 540,770 190,522 42,959 41,093 21,854 19,239 5,482 13,757 3,731 19,097 (1,609) (685) (924) -0.38 -0.38 $ $ $ $ $ 780,799 404,051 322,524 3,403 461,581 269,109 47,274 36,180 18,411 17,769 489 17,280 3,596 14,830 6,046 2,059 3,987 1.61 1.57 $ $ $ $ $ 772,285 349,692 366,075 3,403 435,553 291,486 43,031 35,179 19,451 15,728 350 15,378 3,555 13,858 5,075 1,678 3,397 1.37 1.36 $ $ $ $ $ 607,648 341,937 218,247 3,403 355,780 205,266 44,588 35,434 21,734 13,700 1,090 12,610 2,781 12,268 3,123 966 2,157 0.88 0.87 $ $ $ $ $ 523,183 333,062 145,374 3,403 338,782 138,344 43,727 38,224 25,391 12,833 710 12,123 1,492 10,695 2,920 1,010 1,910 0.79 0.78 -0.12% -2.05% 2.37% 2.56% 2.56% 2.43% 0.51% 8.69% 2.27% 2.28% 2.40% 1.91% 0.47% 7.57% 2.18% 1.90% 2.31% 1.93% 0.38% 4.95% 2.37% 2.53% 2.56% 2.16% 0.37% 4.57% 2.24% 2.21% 2.59% 2.09% Non-performing assets to total assets at end of year Allowance for loan losses to non-performing loans 0.69% 1,057.39% 0.09% 754.35% 0.28% 492.75% 0.58% 220.33% 0.49% 240.02% CAPITAL RATIOS Shareholders’ equity to total assets at end of period Average shareholders’ equity to average assets Ratio of average interest-earning assets to average interest-bearing liabilities OTHER DATA Book value per common share outstanding. Dividends declared per share Dividend payout ratio Number of full-service offices 5.53% 5.77% 6.05% 5.91% 5.57% 6.25% 7.34% 7.68% 8.36% 8.17% 106.74% 105.01% 104.53% 104.86% 106.90% $ $ $ $ 17.16 0.52 (1) 17 $ $ 18.98 0.52 32% 16 $ $ 17.25 0.52 38% 16 $ $ 18.06 0.52 59% 15 17.71 0.52 65% 14 (1) Calculation of the Dividend Payout Ratio Is not meaningful due to the net loss for fiscal 2005. 2 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS currently available. However, it is possible that other factors and circumstances could GENERAL result in a different final realized loss on these assets. We can make no prediction at this Meta Financial Group, Inc. (the “Company”) is a bank holding company whose primary time as to any other losses or recoveries that might occur related to the bankruptcy and subsidiaries are MetaBank and MetaBank West Central (“MetaBank WC”). The Company related matters. See “Non-performing Assets and Allowance For Loan Losses,” herein. was incorporated in 1993 as a unitary non-diversified savings and loan holding company On May 6, 2004, the Company announced that MetaBank had started a new oper- and, on September 20, 1993, acquired all of the capital stock of MetaBank in connection ating division to position the Company to take advantage of opportunities in the growing with MetaBank’s conversion from mutual to stock form of ownership. On September 30, area of prepaid debit cards and related systems and services. On May 4, 2004, the first 1996, the Company became a bank holding company in conjunction with the acquisition five members of the management group leading this new division joined MetaBank. of MetaBank WC. These individuals have extensive experience and a proven track record for creating value The Company focuses on establishing and maintaining long-term relationships with and profitability in this emerging market. As of September 30, 2004, the division had a customers, and is committed to serving the financial service needs of the communities total of seventeen (17) employees, operating under the name Meta Payment Systems. in its market area. The Company’s primary market area includes the following counties: The first cards for the operation were issued during the fourth quarter of the fiscal year Adair, Buena Vista, Dallas, Guthrie, Pocahontas, Polk, and Sac located in Iowa, and the ended September 30, 2004. The development process continued throughout the fiscal counties of Brookings, Lincoln and Minnehaha located in east central South Dakota. year ended September 30, 2005, at which point the division had twenty-nine (29) The Company attracts retail deposits from the general public and uses those deposits, employees. Meta Payment Systems, which constitutes an operating segment for financial together with other borrowed funds, to originate and purchase residential and commer- reporting purposes, is based in Sioux Falls, South Dakota, and relocated to the newly cial mortgage loans, to originate consumer, agricultural and other commercial loans. completed MetaBank office building in October 2005. During the first thirteen months of The Company’s basic mission is to maintain and enhance core earnings while operations, primarily the start-up phase, through June 30, 2005, Meta Payment Systems serving its primary market area. As such, the Board of Directors has adopted a business generated an operating loss of almost $1.4 million, net of income taxes. The Meta strategy designed to (i) maintain the Company’s tangible capital in excess of regulatory Payment System operating loss for the fiscal year ended September 30, 2005 totaled requirements, (ii) maintain the quality of the Company’s assets, (iii) control operating $808,000, or $0.33 per diluted share. (See Note 18 of Notes to Consolidated Financial expenses, (iv) maintain and, as possible, increase the Company’s interest rate spread, Statements.) However, in the fourth quarter of fiscal 2005, Meta Payment Systems and (v) manage the Company’s exposure to changes in interest rates. generated a profit of $59,000. It is anticipated that, going forward, the division will continue to operate profitably. CORPORATE DEVELOPMENTS IN FISCAL 2005 On August 8, 2005, MetaBank opened its third office in Sioux Falls, South Dakota. During the third fiscal quarter of 2005, the Company determined that $9.8 million of its The facility, small but strategically located, had been announced near the end of the assets were impaired under generally accepted accounting principles. The Company was second fiscal quarter. A fourth Sioux Falls office opened on October 24, 2005. It is a the lead lender and servicer of approximately $32.0 million in loans to three affiliated large facility designed to house branch operations, commercial lending for the Sioux Falls companies and their owners. Approximately $22.2 million of the total had been sold to market, Meta Payment Systems and several other corporate functions. As a result of ten participating financial institutions. The Company’s portion of the affected assets opening of new branch offices, additional expenses will be incurred, primarily in compen- included total operating loans secured by new and used cars and contracts receivable of sation and benefits, and in costs associated with owning, operating and maintaining an approximately $6.8 million to two of the companies, which filed for reorganization under office building. Chapter 11 of the U.S. Bankruptcy Code in June 2005. The Company also had real During the second quarter of the fiscal year, the Company obtained the required estate loans totaling approximately $2.0 million to the third company, and $1.0 million approvals and completed the name change that was announced during fiscal 2004. to the majority owner of the three companies. As of June 30, 2005, $7.6 million of the First Midwest Financial, Inc. became Meta Financial Group, Inc., First Federal Savings loans related to these borrowers were deemed non-performing, and placed on non- Bank of the Midwest became MetaBank, Security State Bank became MetaBank West accrual status. In early July, the Company took possession of the assets of one of the Central, and First Services Trust Corporation became Meta Trust Company. The Meta companies that had filed for reorganization, and subsequently accepted deeds on the real estate from the third company and the majority owner. The other company remains name is symbolic of positive change and expands on the existing operating philosophy of the Company and its subsidiaries to make money management easy for individuals in Chapter 11 bankruptcy. During the fourth quarter of fiscal 2005, the loan balances, and businesses through every life change. The costs associated with the name change, except for loans to the one company still in bankruptcy, were transferred to foreclosed net of income taxes, reduced net income by $428,000, or $.17 per diluted share, during real estate or repossessed assets, net of specific allowance. The process of liquidation fiscal 2005. The Company’s stock has continued after the name change to trade on the of assets of all three companies has been underway since early July. Based on an exten- NASDAQ National Market under the symbol “CASH”. sive review and evaluation of the assets, including use of outside expertise, the Company concluded that, as of June 30, 2005, an additional provision for loan losses was required FINANCIAL CONDITION in the amount of $4.8 million. One loan totaling $1.3 million was charged to the The following discussion of the Company’s consolidated financial condition should allowance as of June 30, 2005, and $2.5 million of the additional allowance was offset be read in conjunction with the Selected Consolidated Financial Information and against the loan balances when the transfers to foreclosed real estate and repossessed Consolidated Financial Statements and the related notes included elsewhere herein. assets took place. The Company also estimated that the costs related to the liquidation of the assets could be as much as $500,000. During the fourth fiscal quarter, the The Company’s total assets at September 30, 2005 were $776.3 million, a decrease of $4.5 million, or 0.6%, from $780.8 million at September 30, 2004. The Company’s expenses related to the liquidation totaled $330,000, or $218,000 net of decrease in assets was due primarily to a decrease in securities available for sale, which income taxes. The additional provision recorded in the third quarter reduced net income was partially offset primarily by increases in net loans receivable, cash and cash equiva- per diluted share for the fiscal year by $1.25, and the liquidation expenses incurred lents, foreclosed real estate and other repossessed assets and premises and equipment. during the fourth quarter reduced earnings per diluted share by $.09 for both the quarter The Company’s portfolio of securities purchased under agreements to resell and and the fiscal year. The Company believes that the $4.8 million in additional allowance available for sale decreased $54.1 million, or 16.8%, to $268.4 million at September related to these assets was, and continues to be, reasonable based on information 30, 2005 from $322.5 million at September 30, 2004. The Company’s portfolio of 3 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS securities available for sale consists primarily of mortgage-backed securities, most with demand, and deposit flows. The Company, like other financial institutions, is subject balloon maturities, which have relatively short expected average lives and limited matu- to interest rate risk to the extent that its interest-earning assets mature or reprice at rity extension. During fiscal 2005, purchases of securities available for sale increased to different times, or on a different basis, than its interest-bearing liabilities. $55.1 million from $46.2 million in 2004. Additionally, $25.8 million of securities avail- The Company’s non-interest income is derived primarily from the activities of the able for sale were sold during fiscal 2005 at a net loss of $19,000. Repayment and Meta Payment Systems division of MetaBank and fees charged on transaction accounts, prepayment of principal decreased, to $78.0 million in 2005 from $89.2 million in 2004. which help offset the costs associated with establishing and maintaining these deposit Excess funds provided by repayment of securities were used to fund loan growth. (See accounts. In addition, non-interest income is derived from gains or losses on the sale of Note 4 of Notes to Consolidated Financial Statements.) loans and securities available for sale. Additionally, non-interest income has been derived The Company’s portfolio of net loans receivable increased by $36.1 million, or from the activities of Meta Trust Company, a wholly-owned subsidiary of Meta Financial 8.9%, to $440.2 million at September 30, 2005 from $404.1 million at September 30, Group, which provides a variety of professional trust services. 2004. Net loans receivable increased as a result of the increased origination of commer- cial and multi-family real estate loans on existing and newly constructed properties and COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED the increased origination of commercial business loans. The total of purchased commer- SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004 cial real estate and business loans decreased during the year. In addition, the increase GENERAL reflects small increases in consumer loans and conventional one to four family residen- The Company recorded a net loss of $924,000 for the year ended September 30, 2005, tial mortgage loans. (See Note 5 of Notes to Consolidated Financial Statements.) compared to net income of $3,987,000 for the year ended September 30, 2004. The The Company’s investment in the Federal Home Loan Bank of Des Moines (“FHLB”) decrease in net income primarily reflects a substantial increase of in the provision for stock decreased $2.9 million, or 26.2%, to $8.2 million at September 30, 2005 from loan losses, as discussed above in “Corporate Developments in 2005”. In addition, $11.1 million at September 30, 2004. The decrease was due to a decrease in the level there was an increase in non-interest expense. These items were partially offset by of borrowings from the FHLB, which require a calculated level of stock investment based an increase in net interest income and a small increase in non-interest income. on a formula determined by the FHLB. Customer deposit balances increased by $79.2 million, or 17.2%, to $540.8 million NET INTEREST INCOME at September 30, 2005 from $461.6 million at September 30, 2004. The increase in Net interest income for the year ended September 30, 2005 increased by $1,471,000, deposits is primarily due to the operations of the Meta Payment Systems division of or 8.3%, to $19,240,000 compared to $17,769,000 for the period ended September MetaBank. The division’s deposit grew by $72.5 million, all but $15,000 of which was 30, 2004. The increase in net interest income reflects a $9,404,000 increase in the in non-interest bearing accounts. In addition to the growth provided by Meta Payment average balance of interest-earning assets, and an increase in the net yield on average Systems, the Company’s total checking balances, savings account balances and certifi- earning assets. The net yield on average earning assets increased to 2.56% for the cates of deposit grew by $16.0 million, $16.6 million and $3.4 million, respectively. period ended September 30, 2005 from 2.40% for the same period in 2004. The These increases were partially offset by a decrease of $29.3 million in money market increase in net yield on average earning assets was due primarily to a change in the accounts. The overall increase in deposits, along with the net decrease in securities composition of the balance sheet during the year which resulted in significant growth in available for sale, was used to reduce borrowings and fund loan growth during the loans receivable and a significant reduction in securities available for sale. The average period. (See Note 8 of Notes to Consolidated Financial Statements.) interest rate spread between loans and interest-bearing deposits decreased to 4.19% The Company’s borrowings from the Federal Home Loan Bank decreased by for the fiscal year ended September 30, 2005 from 4.35% for the previous year. The $66.6 million, or 29.4%, to $159.7 million at September 30, 2005 from $226.3 million decrease in spread reflects an increase in the average cost of deposits due to the gen- at September 30, 2004. The balance in securities sold under agreements to repurchase eral increase in market rates on deposits, and to a competitive rate environment for decreased by $12.0 million, or 37.0%, to $20.5 million at September 30, 2005 from commercial real estate and commercial operating loans, on which rates increased but $32.5 million at September 30, 2004. The overall decrease in borrowings was more by a lesser amount. The decrease in spread does not factor in the significant increase than offset by the increase in deposits. (See Notes 9 and 10 of Notes to Consolidated Financial Statements.) in non-interest bearing deposits during the year. Had the non-interest bearing deposits been considered, the spread would have decreased by seven basis points instead of Shareholders’ equity decreased $4.3 million, or 9.1%, to $43.0 million at sixteen. Interest rates, particularly at the shorter end of the yield curve, increased during September 30, 2005 from $47.3 million at September 30, 2004. The decrease in the last half of fiscal 2004 and throughout fiscal 2005. The yield curve flattened signifi- shareholders’ equity was primarily due to the net loss for the year, an increase in cantly during the same period of time. Management believes interest rates in fiscal 2006 unrealized loss on securities available for sale in accordance with SFAS 115, dividends will more likely increase than decrease. This should result in an increase in both interest paid to shareholders and the purchase of Company stock for the Employee Stock income and in interest expense during the coming year, which combined with continued Ownership Plan during the period. (See Note 16 of Notes to Consolidated Financial growth in shorter term adjustable loans and lower cost deposits, would increase net Statements.) interest income. RESULTS OF OPERATIONS INTEREST AND DIVIDEND INCOME The following discussion of the Company’s results of operations should be read in con- junction with the Selected Consolidated Financial Information and Consolidated Financial Interest and dividend income for the year ended September 30, 2005 increased $4,913,000, or 13.6%, to $41,093,000 from $36,180,000 for the same period in Statements and the related notes included elsewhere herein. 2004. The increase was due primarily to an increase of $5,572,000 in interest income The Company’s results of operations are primarily dependent on net interest income, from loans receivable, which was the result of an increase of $61,696,000 in the aver- non-interest income, non-interest expense and income tax expense. Net interest income age balance of loans receivable during the period. This increase was partially offset by is the difference, or spread, between the average yield on interest-earning assets and a decrease of $659,000 in interest and dividends on investments which was the result the average rate paid on interest-bearing liabilities. The interest rate spread is affected of a decrease of $52,292,000 in the average balance of these assets during the period. by regulatory, economic, and competitive factors that influence interest rates, loan The yield on loans receivable increased by .36% during the period. 4 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS The following table sets forth the weighted average effective interest rate on interest-earning assets and interest-bearing liabilities at the end of each of the years presented. AT SEPTEMBER 30, 2005 2004 2003 WEIGHTED AVERAGE YIELD ON Loans receivable Mortgage-backed securities available for sale Securities available for sale FHLB stock Combined weighted average yield on interest-earning assets WEIGHTED AVERAGE RATE PAID ON Demand, NOW and money market demand deposits Savings deposits Time deposits FHLB advances Other borrowed money Combined weighted average rate paid on interest-bearing liabilities Spread RATE/VOLUME ANALYSIS 6.76% 3.79 3.95 1.40 5.58 1.18 2.81 3.43 4.56 4.49 3.02 2.56 6.04% 3.81 2.50 2.25 4.94 1.22 1.32 2.81 3.62 3.23 2.66 2.28 6.17% 2.87 2.23 3.00 4.42 0.83 1.14 2.78 3.40 1.71 2.52 1.90 The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase related to higher outstanding balances and that due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. YEAR ENDED SEPTEMBER 30, (in Thousands) INTEREST-EARNING ASSETS Loans receivable Mortgage-backed securities available for sale Securities available for sale FHLB stock Total interest-earning assets INTEREST-BEARING LIABILITIES Demand, NOW and money market deposits Savings deposits Time deposits FHLB advances Other borrowed money Total interest-bearing liabilities Net effect on net interest income 2005 VS. 2004 2004 VS. 2003 Increase (Decrease) Due to Volume Increase (Decrease) Total Increase Due to Rate (Decrease) Increase (Decrease) Due to Volume Increase (Decrease) Total Increase Due to Rate (Decrease) $ $ $ $ $ 4,220 (1,867) (27) - 2,326 (5) 489 (600) 257 (420) (279) 2,605 $ $ $ $ $ 1,351 640 518 78 2,587 572 357 1,628 489 675 3,721 (1,134) $ $ $ $ $ 5,571 (1,227) 491 78 4,913 567 846 1,028 746 255 3,442 1,471 $ $ $ $ $ 1,981 991 6 25 3,003 202 249 805 973 (906) 1,263 1,740 $ $ $ $ $ (1,820) (20) (72) (90) (2,002) (12) 19 (2,115) (721) 526 (2,303) 301 $ $ $ $ $ 161 971 (66) (65) (1,001) 190 268 (1,310) 252 (440) (1,040) 2,041 5 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS AVERAGE BALANCES, INTEREST RATES AND YIELDS The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments have been made. Non-accruing loans have been included in the table as loans carrying a zero yield. YEAR ENDED SEPTEMBER 30, 2004 2003 2002 (Dollars in Thousands) INTEREST-EARNING ASSETS Loans receivable(1) Mortgage-backed securities available for sale Securities available for sale FHLB stock Total interest-earning assets Non-interest-earning assets Total assets INTEREST-BEARING LIABILITIES Demand, NOW and money market demand deposits Savings deposits Time deposits FHLB advances Other borrowed money Total interest-bearing liabilities Non-interest-bearing: Deposits Liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest-earning assets Net interest income Net interest rate spread Net yield on average interest-earning assets Average interest-earning assets to average Interest Earned /Paid 29,831 9,644 1,319 299 41,093 1,856 1,321 8,903 8,295 1,478 21,853 $ $ $ $ Average Outstanding Balance 436,146 265,996 38,100 10,349 750,591 35,607 786,198 112,495 57,566 285,115 209,618 38,377 703,171 34,794 2,882 740,847 45,351 786,198 47,420 $ $ $ $ $ Interest Earned /Paid 24,260 10,871 828 221 36,180 1,289 475 7,875 7,549 1,223 18,411 $ $ $ $ Average Outstanding Balance Yield /Rate 6.84% $ 3.63 3.46 2.89 5.48% $ 374,450 317,489 38,886 10,362 741,187 34,477 775,664 1.65% $ 2.29 3.12 3.96 3.85 3.11% $ $ 112,817 36,236 304,322 203,135 49,287 705,797 19,419 4,582 729,798 45,866 775,664 35,390 Interest Earned /Paid 24,099 9,900 894 286 35,179 1,099 207 9,185 7,297 1,663 19,451 $ $ $ $ Yield /Rate Average Outstanding Balance 6.48% $ 3.42 2.13 2.13 4.88% $ 343,879 288,560 38,623 9,188 680,250 37,737 717,987 1.14% $ 1.31 2.59 3.72 2.48 2.61% $ $ 95,118 17,239 273,214 176,961 88,209 650,741 15,375 6,978 673,094 44,893 717,987 29,509 $ 19,240 $ 17,769 $ 15,728 2.37% 2.56% 2.27% 2.40% Yield /Rate 7.01% 3.43 2.31 3.11 5.17% 1.16% 1.20 3.36 4.12 1.89 2.99% 2.18% 2.31% interest-bearing liabilities 106.74% 105.01% 104.53% (1) Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses. INTEREST EXPENSE Interest expense increased $3,443,000, or 18.7%, to $21,854,000 for the year ended review of the loan portfolio, historic loan losses, current economic conditions, growth of the loan portfolio, and other factors, the current level of provision for loan losses, and the September 30, 2005 from $18,411,000 for the 2004. Interest expense on deposits resulting level of the allowance for loan losses, reflects an adequate allowance against increased by $2,441,000, due primarily to an increase in the average rates paid on probable losses from the loan portfolio at such date. interest-bearing deposits during the period to 2.65% from 2.13%, and to a $1,801,000 Economic conditions in the agricultural sector of the Company’s market areas are increase in the average balance of interest-bearing deposits between the periods. The currently strong and stable. In 2005, above average yields offset modest deterioration in average balance of non-interest bearing deposits increased by $15,375,000 which commodity prices. The agricultural economy is accustomed to commodity price fluctua- resulted in an increase of $17,176,000 in the average balance of deposits. Interest tions and is generally able to handle such fluctuations without significant problem. Higher expense on FHLB advances and other borrowings increased by $1,002,000 during petroleum prices had some dampening effect on 2005 profits and could cause more of the period, due to an increase in the average cost to 3.94% from 3.48%, which was a negative impact on profits in 2006 and beyond due to price increases in chemicals partially offset by a decrease of $4,427,000 in the average balance outstanding used in agricultural production. Increased interest rates will also be a negative factor during the period. PROVISION FOR LOAN LOSSES for the agricultural sector. Should there be an extended period of low commodity prices, the Company’s agricultural loan portfolio could weaken and create a need for the Company to increase its allowance for loan losses through increased charges to provi- The provision for loan losses for the year ended September 30, 2005 was $5,482,000 sion for loan losses. compared to $489,000 for the same period in 2004. The primary reason for the signifi- During recent years, the Company has increased its origination of multi-family, cant increase in the provision for loan losses was the problem credits discussed earlier commercial real estate and commercial business loans. The Company anticipates activity in “Corporate Developments in 2005”. Management believes that, based on a detailed in this type of lending to continue in future years. While generally carrying higher rates, 6 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS this lending activity is considered to carry a higher level of risk due to the nature of the NET INTEREST INCOME collateral and the size of individual loans. Furthermore, although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition, the Company’s determination of the allowance for loan losses is subject to review by its regulatory agencies, which can require the establishment of additional general or specific allowances. NON-INTEREST INCOME Non-interest income increased by $135,000, or 3.8%, to $3,731,000 for the year ended September 30, 2005 from $3,596,000 for the same period in 2004. The increase in non-interest income is primarily the result of an increase in other income of $1,408,000 and an increase in fees on deposits of $56,000. These increases were substantially offset by a non-recurring gain of $1,113,000 on the sale of a branch Net interest income for the year ended September 30, 2004 increased by $2,041,000, or 13.0%, to $17,769,000 compared to $15,728,000 for the period ended September 30, 2003. The increase in net interest income reflects a $60.9 million increase in the average balance of interest-earning assets, and an increase in the net yield on average earning assets. The net yield on average earning assets increased to 2.40% for the period ended September 30, 2004 from 2.31% for the same period in 2003. The increase in net yield on average earning assets was due primarily to balance sheet growth during the year as the result of the growth in loans receivable. The average interest rate spread between loans and deposits increased to 4.35% for the fiscal year ended September 30, 2004 from 4.29% for the previous year. The increase in spread reflects a reduction in the average cost of deposits due to an increase in the level of lower cost transactional deposit accounts and an increased percentage of originated commercial loans at relatively higher yields during the period. Interest rates, particularly at the shorter end of the yield curve, increased during the last half of fiscal 2004. office during 2004, a decrease in the gain on sale of loans of $54,000, a decrease in INTEREST AND DIVIDEND INCOME the return on Bank Owned Life Insurance of $52,000 and a net loss of $19,000 on the sales of securities available for sale. The increase in other income was due to fee income generated by the Meta Payment Systems division of MetaBank, which totaled $1,591,000 for 2005, compared to $7,000 for 2004. The increase in deposit fees is Interest and dividend income for the year ended September 30, 2004 increased $1,001,000, or 2.8%, to $36,180,000 from $35,179,000 for the same period in 2003. The increase was due primarily to an increase of $840,000 in interest and dividends on investments which was the result of an increase of $30,366,000 in the average primarily the result of an increase in transaction account balances in 2005 compared balance of these assets during the period. Additionally, there was an increase of to 2004. The decrease in gain on the sale of loans reflects a lower volume of originations of 1-to-4 family, fixed rate loans during the year due to the slow down in the mortgage- refinancing market resulting from increased market rates. It is anticipated that fiscal 2006 will produce significant continued growth in fee income from Meta Payment Systems and an increase in deposit related service charges with continued growth in $161,000 in interest income from loans receivable which was the result of an increase of $30,571,000 in the average balance of loans receivable during the period. The yield on loans receivable decreased by .53% during the period, which partially offset the increase in income from the higher average balance. checking balances. Gains on the sale of loans will likely be flat due to current interest INTEREST EXPENSE rate environment. NON-INTEREST EXPENSE Non-interest expense increased by $4,266,000, or 28.8%, to $19,097,000 for the year ended September 30, 2005 from $14,831,000 for the same period in 2004. The increase in non-interest expense primarily reflects the costs associated with the start-up of operations for Meta Payment Systems, costs related to the process of changing corporate names, costs associated with the liquidation of the repossessed assets and Interest expense decreased $1,040,000, or 5.3%, to $18,411,000 for the year ended September 30, 2004 from $19,451,000 for the 2003. Interest expense on deposits decreased by $851,000 due primarily to a decrease in the average rates paid on deposits during the period from 2.72% to 2.13%, which was partially offset by a $67,804,000 increase in the average balance of deposits between the periods. Interest expense on FHLB advances and other borrowings decreased by $188,000 during the period, due to a decrease of $12,748,000 in the average balance outstanding during the period, which was partially offset by an increase in the average cost from 3.38% foreclosed real estate arising from the loans discussed in “Corporate Developments in to 3.48%. 2005”, a full year of operations of the second Sioux Falls office ( which opened late in fiscal 2004), the opening of a third office and preparation for opening a fourth office in Sioux Falls, South Dakota, and additional staffing in the lending departments. INCOME TAX EXPENSE Due to the net loss for the year ended September 30, 2005, the Company recorded a benefit of $685,000, compared to an expense of $2,059,000 for the year ended PROVISION FOR LOAN LOSSES The provision for loan losses for the year ended September 30, 2004 was $489,000 compared to $350,000 for the same period in 2003. Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic condi- tions, growth of the loan portfolio, and other factors, the current level of provision for loan losses, and the resulting level of the allowance for loan losses, reflects an adequate September 30, 2004. The increase in income taxes is reflective of the change in operat- allowance against probable losses from the loan portfolio at such date. ing result between the comparable periods. NON-INTEREST INCOME COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED Non-interest income increased by $41,000, or 1.1%, to $3,596,000 for the year ended SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 GENERAL Net income for the year ended September 30, 2004 increased $590,000, or 17.4%, to $3,987,000, from $3,397,000 for the same period ended September 30, 2003. The increase in net income reflects an increase in net interest income and a small increase in non-interest income, which were partially offset by an increase in non-interest expense and a small increase in provision for loan losses. September 30, 2004 from $3,555,000 for the same period in 2003. The increase in non-interest income was the result of the sale of the Company’s branch office in Manson, Iowa, which resulted in a profit of $1,113,000. This profit was substantially offset by decreases in gain on the sale of loans, gain on sales of securities available for sale, deposit service charges and other income, which decreased by $661,000, $242,000, $49,000 and $57,000, respectively. The decrease in gain on the sale of loans reflects a lower volume of originations of 1-to-4 family, fixed rate loans during 7 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS the year due to the slow down in the mortgage-refinancing market. The decrease in ASSET/LIABILITY MANAGEMENT AND MARKET RISK the gain on sale of securities available for sale is due to no security sales having taken QUALITATIVE ASPECTS OF MARKET RISK place during the year. The decrease in other non-interest income was the result of a As stated above, the Company derives its income primarily from the excess of interest non-recurring gain of $177,000 during the previous fiscal year on the sale of a building collected over interest paid. The rates of interest the Company earns on assets and formerly used as a drive up facility. NON-INTEREST EXPENSE pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, the Company’s results of operations, like those of most financial institution holding companies and financial institutions, are Non-interest expense increased by $972,000, or 7.0%, to $14,831,000 for the year impacted by changes in interest rates and the interest rate sensitivity of its assets and ended September 30, 2004 from $13,858,000 for the same period in 2003. The liabilities. The risk associated with changes in interest rates and the Company’s ability increase in non-interest expense primarily reflects the costs associated with the start- to adapt to these changes is known as interest rate risk and is the Company’s only up of operations for Meta Payment Systems, opening of the second banking office in significant “market” risk. Sioux Falls, South Dakota, and additional staffing in the lending departments. These increases were partially offset by $501,000 in prepayment fees associated with the QUANTITATIVE ASPECTS OF MARKET RISK early extinguishment of FHLB advances incurred in fiscal 2003, which did not recur i In an attempt to manage the Company’s exposure to changes in interest rates and n fiscal 2004. INCOME TAX EXPENSE comply with applicable regulations, we monitor the Company’s interest rate risk. In monitoring interest rate risk, we analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensi- Income tax expense increased by $380,000, or 22.7%, to $2,059,000 for the year tivity to actual or potential changes in market interest rates. ended September 30, 2004 from $1,678,000 for the same period in 2003. The An asset or liability is interest rate sensitive within a specific time period if it will increase in income tax expense reflects the increase in the level of taxable income mature or reprice within that time period. If the Company’s assets mature or reprice between the comparable periods. CRITICAL ACCOUNTING POLICY more rapidly or to a greater extent than its liabilities, then net portfolio value and net interest income would tend to increase during periods of rising rates and decrease during periods of falling interest rates. Conversely, if the Company’s assets mature or The Company’s financial statements are prepared in accordance with accounting princi- reprice more slowly or to a lesser extent than its liabilities, then net portfolio value and ples generally accepted in the United States of America. The financial information con- net interest income would tend to decrease during periods of rising interest rates and tained within these statements is, to a significant extent, financial information that is increase during periods of falling interest rates. based on approximate measures of the financial effects of transactions and events that The Company currently focuses lending efforts toward originating and purchasing have already occurred. Based on its consideration of accounting policies that involve competitively priced adjustable-rate and fixed-rate loan products with short to intermedi- the most complex and subjective decisions and assessments, management has identi- ate terms to maturity, generally 5 years or less. This theoretically allows the Company fied its most critical accounting policies to be those related to the allowance for loan to maintain a portfolio of loans that will have relatively little sensitivity to changes in the losses and asset impairment judgments including the recoverability of goodwill. level of interest rates while providing a reasonable spread to the cost of liabilities used The Company’s allowance for loan loss methodology incorporates a variety of risk to fund the loans. considerations, both quantitative and qualitative in establishing an allowance for loan The Company’s primary objective for its investment portfolio is to provide the liquidity loss that management believes is appropriate at each reporting date. Quantitative necessary to meet the funding needs of the loan portfolio. The investment portfolio is factors include the Company’s historical loss experience, delinquency and charge- also used in the ongoing management of changes to the Company’s asset/liability mix, off trends, collateral values, changes in nonperforming loans, and other factors. while contributing to profitability through earnings flow. The investment policy generally Quantitative factors also incorporate known information about individual loans, includ- calls for funds to be invested among various categories of security types and maturities ing borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic condi- based upon the Company’s need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for tions throughout the Midwest and in particular, the state of certain industries. Size and borrowings, and to fulfill the Company’s asset/liability management goals. complexity of individual credits in relation to loan structure, existing loan policies and The Company’s cost of funds responds to changes in interest rates due to the pace of portfolio growth are other qualitative factors that are considered in the method- relatively short-term nature of its deposit portfolio, and due to the relatively short-term ology. As the Company adds new products and increases the complexity of its loan nature of a portion of its borrowed funds. Consequently, the results of operations are portfolio, it will consider enhancing its methodology accordingly. Management may generally influenced by the level of short-term interest rates. The Company offers a report a materially different amount for the provision for loan losses in the statement range of maturities on its deposit products at competitive rates and monitors the maturi- of operations to change the allowance for loan losses if its assessment of the above ties on an ongoing basis. The Company uses borrowed funds for both the purchase of factors changes. This discussion and analysis should be read in conjunction with the investment securities and for day-to-day cash management. Company’s financial statements and the accompanying notes presented elsewhere The Company emphasizes and promotes its savings, money market, demand and herein, as well as the portion of this Management’s Discussion and Analysis section entitled “Asset Quality.” Although management believes the levels of the allowance NOW accounts and, subject to market conditions, certificates of deposit with maturities of three months through five years, principally in its primary market area. The savings as of both September 30, 2005 and September 30, 2004 were adequate to absorb and NOW accounts tend to be less susceptible to rapid changes in interest rates. probable losses inherent in the loan portfolio, a decline in local economic conditions In managing its asset/liability mix, the Company, at times, depending on the relation- or other factors, could result in increasing losses. (See Notes 1 and 5 of Notes to ship between long-term and short-term interest rates, market conditions, and consumer Consolidated Financial Statements.) preference, may place somewhat greater emphasis on maximizing its net interest Goodwill represents the excess of acquisition costs over the fair value of the net margin than on strictly matching the interest rate sensitivity of its assets and liabilities. assets acquired in a purchase acquisition. Goodwill is tested annually for impairment. Management believes the increased net income that may result from an acceptable 8 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS mismatch in the actual maturity or repricing of its asset and liability portfolios can, at ASSET QUALITY times, provide sufficient returns to justify the increased exposure to sudden and unex- It is management’s belief, based on information available at fiscal year end, that the pected increases in interest rates that may result from such a mismatch. The Company Company’s current asset quality is satisfactory. At September 30, 2005, non-performing has established limits, which may change from time to time, on the level of acceptable assets, consisting of non-accruing loans, accruing loans delinquent 90 days or more, interest rate risk. There can be no assurance, however, that in the event of an adverse restructured loans, foreclosed real estate, and repossessed consumer property, totaled change in interest rates, the Company’s efforts to limit interest rate risk will be successful. $5,389,000, or 0.69% of total assets, compared to $729,000, or 0.09% of total assets, for the fiscal year ended 2004. NET PORTFOLIO VALUE Non-accruing loans at September 30, 2005 include, among others, a commercial The Company uses a net portfolio value (“NPV”) approach to the quantification of interest loan in the amount of $206,000 secured by a building and an agricultural loan in the rate risk. This approach calculates the difference between the present value of expected amount of $218,000 secured by agricultural land. cash flows from assets and the present value of expected cash flows from liabilities, as Foreclosed real estate and repossessed assets at September 30, 2005 totaled well as cash flows from off-balance-sheet contracts. Management of the Company’s $4,706,000, all of which related to the loans discussed earlier in “Corporate assets and liabilities is performed within the context of the marketplace, but also within Developments in Fiscal 2005”. Real estate owned amounted to $1,898,000 and limits established by the Board of Directors on the amount of change in NPV that is repossessed assets, consisting primarily of new and used vehicles, totaled $2,808,000. acceptable given certain interest rate changes. The Company maintains an allowance for loan losses because of the potential that Presented below, as of September 30, 2005 and 2004, is an analysis of the some loans may not be repaid in full. (See Note 1 of Notes to Consolidated Financial Company’s interest rate risk as measured by changes in NPV for an instantaneous and Statements.) At September 30, 2005, the Company had an allowance for loan losses sustained parallel shift in the yield curve, in 100 basis point increments, up and down in the amount of $7,222,000 as compared to $5,371,000 at September 30, 2004. 200 basis points. As illustrated in the table, the Company’s NPV at September 30, 2005 Management’s periodic review of the adequacy of the allowance for loan losses is based was more sensitive to decreasing interest rates than to rising interest rates. This reflects on various subjective and objective factors including the Company’s past loss experience, management’s efforts to maintain the Company’s interest rate sensitivity in light of the known and inherent risks in the portfolio, adverse situations that may affect the borrower’s events since June 2004. During this period the Federal Open Market Committee began ability to repay, the estimated value of any underlying collateral, and current economic to increase short-term interest rates, in twenty-five (25) basis point increments, to a conditions. While management may allocate portions of the allowance for specifically more normal level, from historically low levels. Through November 1, 2005, there have identified problem loan situations, the majority of the allowance is based on judgmental been twelve (12) such increases. As this happened, longer term rates moderated factors related to the overall loan portfolio and is available for any loan charge-offs creating a flattening in the yield curve. This action is indicative of limited concern about that may occur. long-term inflation at this time. While management does not anticipate a significant shift In determining the allowance for loan losses, the Company specifically identifies in market interest rates in the near future, it does believe that there is less risk from loans that it considers to have potential collectibility problems. Based on criteria estab- declining interest rates than from rising interest rates, and interest rate risk management lished by Statement of Financial Accounting Standards (SFAS) No. 114, some of these has reflected this belief. loans are considered to be “impaired” while others are not considered to be impaired, Certain shortcomings are inherent in the method of analysis presented in the table. but possess weaknesses that the Company believes merit additional analysis in estab- For example, although certain assets and liabilities may have similar maturities or peri- lishing the allowance for loan losses. All other loans are evaluated by applying estimated ods to repricing, they may react in different degrees to changes in market interest rates. loss ratios to various pools of loans. The Company then analyzes other factors (such as Also, the interest rates on certain types of assets and liabilities may fluctuate in advance economic conditions) in determining the aggregate amount of the allowance needed. of changes in market interest rates, while interest rates on other types may lag behind At September 30, 2005, $251,000 of the allowance for loan losses was allocated changes in market rates. Additionally, certain assets such as adjustable-rate mortgage to impaired loans (See Note 5 of Notes to Consolidated Financial Statements), loans have features that restrict changes in interest rates on a short-term basis and over $2,448,000 was allocated to identified problem loan situations, and $4,523,000 was the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate from those assumed in calculating the table. allocated an allowance against losses from the overall loan portfolio based on historical loss experience and general economic conditions. At September 30, 2004, $197,000 Finally, the ability of some borrowers to service their debt may decrease in the event of of the allowance for loan losses was allocated to impaired loans, $1,256,000 was an interest rate increase. The Company considers all of these factors in monitoring its allocated to identified problem loan situations, and $3,918,000 was allocated against exposure to interest rate risk. losses from the overall loan portfolio based on historical loss experience and general Management reviews the OTS measurements and related peer reports on NPV and economic conditions. interest rate risk on a quarterly basis. In addition to monitoring selected measures of The September 30, 2005 allowance for loan losses that was allocated to impaired NPV, management also monitors the effects on net interest income resulting from loans was $251,000, which is 37.1% of impaired loans as of that date. The September increases or decreases in interest rates. This measure is used in conjunction with NPV 30, 2004 allowance allocated to impaired loans was $197,000, which is 30.2% of measures to identify excessive interest rate risk. impaired loans at that date. The increase in the dollar amount and percentage of the Change in Interest Rate (Basis Points) Dollars In Thousands Board Limit % Change $ Change At September 30, 2005 % Change $ Change At September 30, 2004 % Change +200 bp +100 bp 0 - 100 bp - 200 bp (40)% (25) - (25) (40) $ (1,904) (411) - (2,773) (9,183) 9 (3)% (1) - (5) (16) $ (5,473) (1,580) - (3,130) (5,631) (12)% (3) - (7) (12) Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS allocated allowance is a result of the specific analysis performed on a loan-by-loan basis agement strategy. The Company adjusts its investments in liquid assets based upon as described above. management’s assessment of (i) expected loan demand, (ii) the projected availability of The September 30, 2005 allowance allocated to other identified problem loan situa- purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bear- tions was $2,448,000 as compared to $1,256,000 at September 30, 2004, an increase ing deposits, and (v) the objectives of its asset/liability management program. Excess liq- of $1,192,000. The increase in the dollar amount of the allocated allowance is due to a uidity is generally invested in interest-earning overnight deposits and other short-term relative increase in identified problem loan situations between the periods and is the government agency obligations. If the Company requires funds beyond its ability to gen- result of a specific analysis performed on a loan-by-loan basis as described above. erate them internally, it has additional borrowing capacity with the FHLB and has collat- The portion of the September 30, 2005 allowance that was not specifically allocated eral eligible for use with reverse repurchase agreements. The Company is not aware of to individual loans was $4,523,000 as compared to $3,918,000 at September 30, any significant trends in the Company’s liquidity or its ability to borrow additional funds if 2004, an increase of $609,000. The increase primarily reflects overall growth in the loan needed. portfolio and a change in the composition of the loan portfolio. In excess of 95 percent of The primary investing activities of the Company are the origination and purchase of the total portfolio growth was in commercial, multi-family and agricultural real estate loans and the purchase of securities. During the years ended September 30, 2005, 2004 loans and commercial and agricultural operating loans. and 2003, the Company originated loans totaling $382.5 million, $295.5 million and LIQUIDITY AND CAPITAL RESOURCES $324.7 million, respectively. Purchases of loans totaled $39.7 million, $39.5 million and $26.2 million during the years ended September 30, 2005, 2004 and 2003, respec- The Company’s primary sources of funds are deposits, borrowings, principal and interest tively. During both fiscal 2005 and fiscal 2004, the mix of loans outstanding changed, payments on loans and mortgage-backed securities, and maturing investment securities. with commercial and multi-family real estate loans, commercial business loans, agricul- While scheduled loan repayments and maturing investments are relatively predictable, tural loans and consumer loans increasing while one-to-four family residential mortgage deposit flows and early loan repayments are influenced by the level of interest rates, gen- loans ended fiscal 2005 slightly higher than at the end of fiscal 2004, but lower than at eral economic conditions, and competition. the end of fiscal 2003. (See Note 5 of Notes to Consolidated Financial Statements.) The Company relies on competitive pricing policies, advertising and customer service During the years ended September 30, 2005, 2004 and 2003, the Company purchased to attract and retain its deposits and only solicits these deposits from its primary market mortgage-backed securities and other securities available for sale in the amount of area. Based on its experience, the Company believes that its passbook savings, money $55.1 million, $46.2 million and $431.7 million, respectively. (See Note 4 of Notes to market savings accounts, NOW and regular checking accounts are relatively stable Consolidated Financial Statements.) sources of deposits. The Company’s ability to attract and retain time deposits has been, At September 30, 2005, the Company had outstanding commitments to originate and will continue to be, significantly affected by market conditions. However, the and purchase loans of $69.7 million. (See Note 15 of Notes to Consolidated Financial Company does not foresee significant funding issues resulting from disintermediation of Statements.) Certificates of deposit scheduled to mature in one year or less from its portfolio of time deposits. In addition, the Meta Payment Systems division of MetaBank September 30, 2005 totaled $170.3 million. Based on its historical experience, manage- has become a significant source of low-cost deposits for the Company, and it is antici- ment believes that a significant portion of such deposits will remain with the Company, pated that it will continue to grow in this regard. however, there can be no assurance that the Company can retain all such deposits. MetaBank and MetaBank WC are required by regulation to maintain sufficient liquid- Management believes that loan repayment and other sources of funds will be adequate ity to assure their safe and sound operation. In the opinion of management, both to meet the Company’s foreseeable short- and long-term liquidity needs. MetaBank and MetaBank WC are in compliance with this requirement. The following table summarizes the Company’s significant contractual obligations at Liquidity management is both a daily and long-term function of the Company’s man- September 30, 2005 (in thousands): Contractual Obligations Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Time deposits Long-term debt Operating leases Subordinated debentures Issued to capital trust Data processing services Total $ 268,122 180,212 614 10,310 2,172 $ 461,430 $ 170,305 47,647 99 - 576 $ 218,627 $ 79,359 65,265 199 - 1,152 $ 145,975 $ $ 18,173 50,000 155 - 444 68,772 $ $ 285 17,300 161 10,310 - 28,056 During July 2001, the Company’s unconsolidated trust subsidiary, First Midwest their qualifying deposits. At September 30, 2005, the remaining liquidation account Financial Capital Trust I, sold $10 million in floating rate cumulative preferred securities. balance was approximately $1.9 million, compared to $2.2 million one year earlier. Proceeds from the sale were used to purchase subordinated debentures of Meta The Company, MetaBank and MetaBank WC are in compliance with their capital Financial Group, which mature in the year 2031, and are redeemable at any time after five years. The Company used the proceeds for general corporate purposes. requirements and are considered “well capitalized” under current regulatory guidelines. (See Note 14 of Notes to Consolidated Financial Statements.) The Company does not On September 20, 1993, the Bank converted from a federally chartered mutual anticipate any significant changes to its capital structure. savings and loan association to a federally chartered stock savings bank. At that time, On August 23, 2004, the Company announced that the Board of Directors had a liquidation account was established for the benefit of eligible account holders who authorized the Company’s ESOP to purchase up to 40,000 shares of the Company’s continue to maintain their account with the Bank after the conversion. The liquidation stock through open market and privately negotiated transactions. The ESOP stock pur- account is reduced annually to the extent that eligible account holders have reduced chase was completed on April 18, 2005 at a total cost of $897,000. A portion of the 10 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS stock, 3,188 shares, was used to fund part of the fiscal 2005 distribution to ESOP partic- This Statement is effective beginning January 1, 2006, for public companies as a ipants. The remaining 36,712 shares will be used in future distributions to participants in result of recent SEC actions. Management believes the impact on the financial state- the Company’s ESOP. ments will be similar to the disclosures made by footnote to the financial statements, On April 26, 2005, the Company announced that the Board of Directors had author- showing the effect on earnings and earnings per share of expensing the value of stock ized the repurchase, at management’s discretion, of up to 100,000 shares of the options granted. Company’s stock through open market and privately negotiated transactions. This repur- In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and chase authorization expires on April 30, 2006. No shares have been repurchased under 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to this authorization. Certain Investments.” The FSP addresses the determination of when an investment The payment of dividends and repurchase of shares has the effect of reducing is considered impaired, whether that impairment is other than temporary, and the stockholders’ equity. Prior to authorizing such transactions, the Board of Directors consid- measurement of an impairment loss. The FSP also includes accounting considerations ers the effect the dividend or repurchase of shares would have on liquidity and capital subsequent to the recognition of an other-than-temporary impairment and requires ratios. The Banks and the Company may declare dividends if certain tolerance limits are certain disclosures about unrealized losses that have not been recognized as other- observed and which include, in the case of MetaBank, consideration of the liquidation than-temporary impairments. The FSP amends FASB Statement No. 115, Accounting balance. (See Note 13 of Notes to Consolidated Financial Stateemnts.) for Certain Investments in Debt and Equity Securities, and FASB Statement No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB IMPACT OF INFLATION AND CHANGING PRICES Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. The Consolidated Financial Statements and Notes thereto presented herein have been The FSP nullifies certain requirements of EITF Issue No. 03-1, “The Meaning of Other- prepared in accordance with generally accepted accounting principles, which require Than-Temporary Impairment and Its Application to Certain Investments,” and super- the measurement of financial position and operating results in terms of historical dollars sedes EITF Abstracts, Topic D-44, “Recognition of Other-Than-Temporary Impairment without considering the change in the relative purchasing power of money over time upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The FSP is due to inflation. The primary impact of inflation is reflected in the increased cost of the required to be applied to reporting periods beginning after December 15, 2005. Company’s operations. Unlike most industrial companies, virtually all the assets and liabil- The Company does not expect adoption to have a material impact on the consolidated ities of the Company are monetary in nature. As a result, interest rates generally have a financial statements. more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction, FORWARD LOOKING STATEMENTS or to the same extent, as the prices of goods and services. The Company, and its wholly-owned subsidiaries, MetaBank and MetaBank WC, may IMPACT OF NEW ACCOUNTING STANDARDS from time to time make written or oral “forward-looking statements,” including state- ments contained in its filings with the Securities and Exchange Commission, in its reports In May 2005, the Financial Accounting Standards Board issued Statement of Financial to shareholders, and in other communications by the Company, which are made in good Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections. This faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. Litigation Reform Act of 1995. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 carries These forward-looking statements include statements with respect to the Company’s forward the guidance contained in Opinion 20 for reporting the correction of an error in beliefs, expectations, estimates and intentions that are subject to significant risks and previously issued financial statements and a change in accounting estimate. However, uncertainties, and are subject to change based on various factors, some of which are SFAS 154 changes the requirements for the accounting for and reporting of a change in beyond the Company’s control. Such statements address the following subjects: future accounting principle. Under this Statement, every voluntary change in accounting princi- operating results; customer growth and retention; loan and other product demand; net ple requires retrospective application to prior periods’ financial statements, unless it is interest income; earnings growth and expectations; new products and services, such as impracticable. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. those offered by the Meta Payment Systems Division; credit quality and adequacy of reserves; technology; and our employees. The following factors, among others, could When a pronouncement includes specific transition provisions, those provisions should cause the Company’s financial performance to differ materially from the expectations, be followed. This Statement is effective for accounting changes and corrections of errors estimates, and intentions expressed in such forward-looking statements: the strength of made in fiscal years beginning after December 15, 2005, although earlier application the United States economy in general and the strength of the local economies in which is permitted for changes and corrections made in fiscal years beginning after June 1, the Company conducts operations; the effects of, and changes in, trade, monetary, and 2005. The Company expects no significant effect on its financial statements as a result fiscal policies and laws, including interest rate policies of the Federal Reserve Board; of the adoption of this statement. inflation, interest rate, market, and monetary fluctuations; the timely development of and In December 2004, the Financial Accounting Standards Board (FASB) issued acceptance of new products and services of the Company and the perceived overall Statement of Financial Accounting Standard No. 123R, Share-Base Payment. This value of these products and services by users; the impact of changes in financial serv- Statement revises SFAS Statement No. 123, Accounting for Stock-Based Compensation, ices’ laws and regulations; technological changes; acquisitions; changes in consumer amends SFAS Statement No. 95, Statement of Cash Flows, and supersedes APB Opinion No. 125, Accounting for Stock Issued to Employees. It requires that all stock-based spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default and managing the risks involved in the foregoing. compensation now be measured at fair value and recognized as expense in the income The foregoing list of factors is not exclusive. Additional discussion of factors affecting statement. This Statement also clarifies and expands guidance on measuring fair value the Company’s business and prospects is contained in the Company’s periodic filings of stock compensation, requires estimation of forfeitures when determining expense, and with the SEC. The Company does not undertake, and expressly disclaims any intent or requires that excess tax benefits be shown as financing cash inflows versus a reduction obligation, to update any forward-looking statement, whether written or oral, that may be of taxes paid in the statement of cash flows. Various other changes are also required. made from time to time by or on behalf of the Company. 11 Meta Financial Group, Inc. and Subsidiaries REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS META FINANCIAL GROUP, INC. AND SUBSIDIARIES STORM LAKE, IOWA We have audited the accompanying consolidated balance sheets of Meta assessing the accounting principles used and significant estimates made by Financial Group, Inc. and Subsidiaries as of September 30, 2005 and 2004, management, as well as evaluating the overall financial statement presenta- and the related consolidated statements of operations, changes in share- tion. We believe that our audits provide a reasonable basis for our opinion. holders’ equity and cash flows for each of the three years in the period In our opinion, the consolidated financial statements referred to above ended September 30, 2005. These financial statements are the responsi- present fair, in all material respects, the financial position of Meta Financial bility of the Company’s management. Our responsibility is to express an Group, Inc. and Subsidiaries as of September 30, 2005 and 2004, and the opinion on these financial statements based on our audits. results of their operations and their cash flows for each of the three years We conducted our audits in accordance with the standards of the Public in the period ended September 30, 2005. In conformity with U.S. generally Company Accounting Oversight Board (United States). Those standards accepted accounting principles. require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the Des Moines, Iowa amounts and disclosures in the financial statements. An audit also includes October 21, 2005 12 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 AND 2004 ASSETS Cash and due from banks Interest-bearing deposits in other financial institutions Total cash and cash equivalents Securities purchased under agreements to resell Securities available for sale Loans receivable, net of allowance for loan losses of $7,222,404 in 2005 and $5,370,994 in 2004 Loans held for sale Federal Home Loan Bank (FHLB) stock, at cost Accrued interest receivable Premises and equipment, net Foreclosed real estate and repossessed assets Bank owned life insurance Goodwill Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Noninterest-bearing demand deposits Savings, NOW and money market demand deposits Time certificates of deposit Total deposits Advances from FHLB Securities sold under agreements to repurchase Subordinated debentures Advances from borrowers for taxes and insurance Accrued interest payable Accrued expenses and other liabilities Total liabilities COMMITMENTS AND CONTINGENCIES (NOTE 15) SHAREHOLDERS’ EQUITY Preferred stock, 800,000 shares authorized; none issued Common stock,$.01 par value; 5,200,000 shares authorized; 2,957,999 shares issued and 2,503,655 shares outstanding at September 30, 2005; 2,957,999 shares issued and 2,491,025 shares outstanding at September 30, 2004 Additional paid-in capital Retained earnings, substantially restricted Accumulated other comprehensive (loss) Unearned Employee Stock Ownership Plan shares Treasury stock, 454,344 and 466,974 common shares, at cost, at September 30, 2005 and 2004, respectively Total shareholders’ equity 2005 2004 $ 5,390,455 8,979,299 14,369,754 37,513,348 230,892,565 440,190,245 306,000 8,161,000 4,240,694 15,126,069 4,706,414 12,332,337 3,403,019 5,107,497 $ 1,591,982 7,344,587 8,936,569 - 322,523,577 404,051,379 270,000 11,052,700 3,849,215 11,690,437 - 11,847,420 3,403,019 3,174,208 $ 776,348,942 $ 780,798,524 $ 102,164,156 170,484,053 268,122,096 540,770,305 159,705,000 20,507,051 10,310,000 271,273 941,935 884,688 733,390,252 $ 19,537,370 177,287,972 264,755,535 461,580,877 226,250,000 32,549,377 10,310,000 216,331 473,426 2,144,248 733,524,259 - - 29,580 20,646,513 34,557,258 (3,180,607) (825,057) (8,268,997) 42,958,690 29,580 20,678,644 36,758,258 (1,240,338) (394,766) (8,557,113) 47,274,265 Total liabilities and shareholders’ equity $ 776,348,942 $ 780,798,524 See Notes to Consolidated Financial Statements. 13 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 Interest and dividend income: Loans receivable, including fees Securities available for sale Dividends on FHLB stock Interest expense: Deposits FHLB advances and other borrowings Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Deposit service charges and other fees Gain on sales of loans, net Bank owned life insurance Gain (loss) on sales of securities available for sale, net Gain on sale of branch office (Loss) on sales of foreclosed real estate, net Brokerage commissions Payment systems revenue Other income Noninterest expense: Employee compensation and benefits Occupancy and equipment expense Deposit insurance premium Data processing expense Prepayment fee on FHLB advances Advertising expense Other expense 2005 2004 2003 $ $ 29,831,923 10,962,756 298,629 41,093,308 $ 24,259,727 11,698,933 221,596 36,180,256 24,098,700 10,794,142 286,311 35,179,153 12,080,046 9,773,747 21,853,793 9,639,441 8,771,744 18,411,185 10,490,920 8,959,831 19,450,751 19,239,515 17,769,071 15,728,402 5,482,000 13,757,515 488,500 17,280,571 350,000 15,378,402 1,330,750 240,428 543,578 (19,334) - - - 1,403,554 231,631 3,730,607 11,398,887 3,455,630 70,296 740,677 - 828,802 2,602,766 19,097,058 1,275,452 293,994 596,018 - 1,113,230 (8,752) 98,466 6,414 220,947 3,595,769 9,473,684 2,369,623 66,480 723,568 - 437,461 1,759,776 14,830,592 1,324,769 955,469 628,957 242,562 - (5,372) 125,374 - 283,297 3,555,056 8,400,501 2,154,355 61,950 634,098 500,674 298,074 1,808,516 13,858,168 Net income (loss) before income tax expense (benefit) (1,608,936) 6,045,748 5,075,290 Income tax expense (benefit) Net income (loss) Earnings per common and common equivalent share: Basic earnings (loss) per common share Diluted earnings (loss) per common share See Notes to Consolidated Financial Statements. (684,685) 2,058,698 1,678,286 $ $ (924,251) (0.38) (0.38) $ $ 3,987,050 1.61 1.57 $ $ 3,397,004 1.37 1.36 14 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 Balance, September 30, 2002 Comprehensive income: Net income for the year ended September 30, 2003 Net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effects Total comprehensive (loss) Purchase of 10,147 common shares of treasury stock Purchase of 35,574 common shares for ESOP 15,000 common shares committed to be released under the ESOP Issuance of 35,292 common shares from treasury stock due to exercise of stock options Tax benefit from exercise of stock options Cash dividends declared on common stock ($.52 per share) Balance, September 30, 2003 Balance, September 30, 2003 Comprehensive income: Net income for the year ended September 30, 2004 Net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effects Total comprehensive income Purchase of 39,470 common shares of treasury stock Purchase of 10,000 common shares for ESOP 13,000 common shares committed to be released under the ESOP Issuance of 36,546 common shares from treasury stock due to exercise of stock options Cash dividends declared on common stock ($.52 per share) Balance, September 30, 2004 Balance, September 30, 2004 Comprehensive (loss): Net (loss) for the year ended September 30, 2005 Net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effects Total comprehensive (loss) Purchase of 1,000 common shares of treasury stock Purchase of 30,000 common shares for ESOP 14,000 common shares committed to be released under the ESOP Issuance of 13,630 common shares from treasury stock due to exercise of stock options Cash dividends declared on common stock ($.52 per share) Balance, September 30, 2005 See Notes to Consolidated Financial Statements. - - - - - - - - - - - - 3,397,004 (3,523,596) (126,592) (165,092) (608,584) 263,055 3,987,050 1,788,424 5,775,474 (906,650) (212,400) 291,018 (924,251) (1,940,269) (2,864,520) (25,655) (684,133) 305,068 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Unearned Employee Stock Ownership Plan Shares Treasury Stock Total Sharehholders’ Equity $ 29,580 $ 20,593,768 $ 31,940,648 $ 494,834 $ (46,142) $ (8,424,922) $ 44,587,766 - - - - - - - - - 10,005 3,397,004 - (3,523,596) - - - - - - - - (608,584) 253,050 (165,092) - - $ $ $ $ $ - - - 29,580 (189,770) 124,876 - $ 20,538,879 - - (1,279,911) $ 34,057,741 - - - $ (3,028,762) - - - (401,676) 425,051 - - $ (8,164,963) 235,281 124,876 (1,279,911) $ 43,030,799 $ 29,580 $ 20,538,879 $ 34,057,741 $ (3,028,762) $ (401,676) $ (8,164,963) $ 43,030,799 - - - - - - - - - 71,708 3,987,050 - 1,788,424 - - - - - - - - (212,400) 219,310 (906,650) - - - - 29,580 68,057 - $ 20,678,644 - (1,286,533) $ 36,758,258 - - $ (1,240,338) - - (394,766) 514,500 - $ (8,557,113) 582,557 (1,286,533) $ 47,274,265 $ 29,580 $ 20,678,644 $ 36,758,258 $ (1,240,338) $ (394,766) $ (8,557,113) $ 47,274,265 - - - - - - - - - 51,226 (924,251) - (1,940,269) - - - - - - - - (684,133) 253,842 (25,655) - - - - 29,580 (83,357) - $ 20,646,513 - (1,276,749) $ 34,557,258 - - $ (3,180,607) - - (825,057) 313,771 - $ (8,268,997) 230,414 (1,276,749) $ 42,958,690 $ 15 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 2005 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: $ (924,251) $ 3,987,050 $ 3,397,004 Effect of contrubution to employee stock ownership plan Depreciation, amortization and accretion, net Provision for loan losses Prepayment fee on FHLB advances (Gain) loss on sales of securities available for sale, net (Gain) on sale of branch office (Gain) on sales of office property, net Proceeds from sales of loans held for sale Originations of loans held for sale (Gain) on sales of loans, net Loss on sales of foreclosed real estate, net Net change in: Accrued interest receivable Other assets Accrued interest payable Accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale Net change in securities purchased under agreement to resell Proceeds from sales of securities available for sale Proceeds from maturities and principal repayments of securities available for sale Loans purchased Net change in loans Proceeds from sales of foreclosed real estate Proceeds from sale of office building Cash transferred to buyer on sale of branch Purchase of FHLB stock Proceeds from redemption of FHLB stock Purchase of premises and equipment Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net change in noninterest-bearing demand, savings, NOW and money market demand deposits Net change in time deposits Proceeds from advances from FHLB Repayments of advances from FHLB Net change in securities sold under agreements to repurchase Net change in advances from borrowers for taxes and insurance Purchase of shares by ESOP Cash dividends paid Proceeds from exercise of stock options Purchase of treasury stock Net cash provided by (used in) financing activities Net change in cash and cash equivalents CASH AND CASH EQUIVALENTS Beginning of year End of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest Income taxes SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Loans transferred to foreclosed real estate and repossessed assets SALE OF BRANCH Assets disposed: Loans Accrued interest receivable Premises and equipment Liabilities assumed by buyer: Noninterest bearing demand, savings, NOW and money market demand accounts Time deposits Advances from borrowers for taxes and insurance Other liabilities Gain on sale of office property, net Cash paid See Notes to Consolidated Financial Statements. 16 305,068 3,276,520 5,482,000 - 19,334 - - 16,272,543 (16,068,115) (240,428) - (391,479) (1,268,382) 468,509 (1,259,560) 5,671,759 (17,628,374) (37,513,348) 25,842,710 78,086,047 (39,697,273) (6,708,447) 22,028 - - (5,113,000) 8,004,700 (4,434,538) 860,505 291,018 4,365,294 488,500 - - (1,113,230) - 18,043,207 (16,892,903) (293,994) 8,752 77,343 (864,592) (33,435) 710,759 8,773,769 (46,204,355) - - 89,167,761 (39,542,108) (16,106,777) 1,158,935 - (14,154,359) (7,879,200) 7,756,800 (1,364,922) (27,168,225) 75,822,867 3,366,561 3,028,725,000 (3,095,270,000) (12,042,326) 54,942 (684,133) (1,276,749) 230,414 (25,655) (1,099,079) 66,183,859 (24,052,970) 2,414,190,000 (2,411,724,394) (25,152,657) (46,602) (212,400) (1,286,533) 582,557 (906,650) 17,574,210 263,055 3,117,158 350,000 500,674 (242,562) - (134,700) 76,465,663 (75,381,542) (955,469) 5,372 388,438 (809,716) (164,172) 451,818 7,251,021 (431,711,574) - 90,473,567 185,761,348 (26,162,845) 17,696,050 631,156 197,169 - (7,786,600) 3,698,900 (1,254,819) (168,457,648) 34,607,349 45,165,640 1,219,200,000 (1,121,006,279) (12,474,194) (87,202) (608,584) (1,279,911) 235,281 (165,092) 163,587,008 5,433,185 (820,246) 2,380,381 7,376,434 9,756,815 19,614,923 1,757,440 418,064 $ $ $ 8,936,569 14,369,754 21,385,284 605,911 4,728,442 $ $ $ 9,756,815 8,936,569 18,444,620 2,213,428 58,349 (730,704) (5,518) (110,818) 6,314,066 9,788,688 5,749 6,126 (1,113,230) 14,154,359 $ $ $ $ $ Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SECURITIES PRINCIPLES OF CONSOLIDATION The Company classifies all securities as available for sale. Available for sale securities The consolidated financial statements include the accounts of Meta Financial Group, Inc. are those the Company may decide to sell if needed for liquidity, asset-liability manage- (the Company) (formerly First Midwest Financial, Inc.) a bank holding company located in ment or other reasons. Available for sale securities are reported at fair value, with net Storm Lake, Iowa, and its wholly owned subsidiaries which include MetaBank (the Bank) unrealized gains and losses reported as other comprehensive income or loss and as a (formerly First Federal Savings Bank of the Midwest), a federally chartered savings bank separate component of shareholders’ equity, net of tax. whose primary regulator is the Office of Thrift Supervision, MetaBank West Central Gains and losses on the sale of securities are determined using the specific identifi- (MBWC) (formerly Security State Bank), a state chartered commercial bank whose primary cation method based on amortized cost and are reflected in results of operations at regulator is the Federal Reserve, First Services Financial Limited and Brookings Service the time of sale. Interest and dividend income, adjusted by amortization of purchase Corporation, which offer noninsured investment products, Meta Trust Company (formerly premium or discount over the estimated life of the security using the level yield method, First Securities Trust Company), which offers various trust services, and, for 2003, First is included in income as earned. Midwest Financial Capital Trust I, which was capitalized in July 2001, for the purpose of Declines in the fair value of held-to-maturity and available-for-sale securities below issuing trust preferred securities. All significant intercompany balances and transactions their cost that are deemed to be other-than-temporary are reflected in earnings as real- have been eliminated. ized losses. In estimating other-then-temporary impairment losses, management consid- ers (1) the length of time and the extent to which the fair value has been less than cost, NATURE OF BUSINESS AND INDUSTRY SEGMENT INFORMATION (2) the financial condition and near-term prospects of the issuer, and (3) the intent and The primary source of income for the Company is interest from the purchase or origination ability of the Company to retain its investment in the issuer for a period of time sufficient of consumer, commercial, agricultural, commercial real estate, and residential real estate to allow for any anticipated recovery in fair value. loans. See Note 5 for a discussion of concentrations of credit risk. The Company accepts deposits from customers in the normal course of business primarily in northwest and LOANS HELD FOR SALE central Iowa and eastern South Dakota. The Company operates primarily in the banking Mortgage loans originated and intended for sale in the secondary market are carried industry which accounts for more than 90% of its revenues, operating income and assets, at the lower of cost or estimated market value in the aggregate. Net unrealized losses with the remaining operations consisting of payment processing services. The Company are recognized in a valuation allowance by charges to income. As assets specifically uses the “management approach” for reporting information about segments in annual and acquired for resale, the origination of, disposition of, and gain/loss on these loans are interim financial statements. The management approach is based on the way the chief classified as operating activities in the statement of cash flows. operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and LOANS RECEIVABLE services, geography, legal structure, management structure and any other manner in which Loans receivable that management has the intent and ability to hold for the foreseeable management disaggregates a company. Based on the “management approach” model, future or until maturity or pay-off are reported at their outstanding principal balances reduced the Company has determined that its business is comprised of two reporting segments. by the allowance for loan losses and any deferred fees or costs on originated loans. Assets held in trust or fiduciary capacity are not assets of the Company and, Premiums or discounts on purchased loans are amortized to income using the level accordingly, are not included in the accompanying consolidated financial statements. yield method over the remaining period to contractual maturity, adjusted for anticipated prepayments. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS Interest income on loans is accrued over the term of the loans based upon the The preparation of financial statements requires management to make estimates and amount of principal outstanding except when serious doubt exists as to the collectibility assumptions that affect the reported amounts of assets, liabilities and disclosure of con- of a loan, in which case the accrual of interest is discontinued. Interest income is tingent assets and liabilities at the date of the financial statements and the reported subsequently recognized only to the extent that cash payments are received until, in amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates; Certain Significant Estimates: The allowance for loan losses and management’s judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status. fair values of securities and other financial instruments involve certain significant esti- mates made by management. These estimates are reviewed by management regularly LOAN ORIGINATION FEES, COMMITMENT FEES, AND however they are particularly susceptible to significant changes in the future. RELATED COSTS CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents is defined to include the Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method. Company’s cash on hand and due from financial institutions and short-term interest- ALLOWANCE FOR LOAN LOSSES bearing deposits in other financial institutions. The Company reports net cash flows for Because some loans may not be repaid in full, an allowance for loan losses is recorded. securities purchased under agreements to resell, customer loan transactions, deposit The allowance for loan losses is increased by a provision for loan losses charged to transactions, and securities sold under agreements to repurchase. The Bank is required to maintain reserve balances in cash or on deposit with the Federal 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 Reserve Bank, based on a percentage of deposits. The total of those reserve balances was evaluation of the adequacy of the allowance is based on the Company’s past loan loss approximately $3,565,000 and $1,055,000 at September 30, 2005 and 2004, respectively. experience, known and inherent risks in the portfolio, adverse situations that may affect SECURITIES PURCHASED UNDER AGREEMENT TO RESELL the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of Securities purchased under agreement to resell mature within one week and are the allowance for specific problem loan situations, the entire allowance is available for carried at cost. any loan charge-offs that occur. 17 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans are considered impaired if full principal or interest payments are not antici- TRANSFERS OF FINANCIAL ASSETS pated in accordance with the contractual loan terms. Impaired loans are carried at the Transfers of financial assets are accounted for as sales, when control over the assets has present value of expected future cash flows discounted at the loan’s effective interest been surrendered. Control over transferred assets is deemed to be surrendered when (1) rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the assets have been isolated from the Company, (2) the transferee obtains the right (free the allowance for loan losses is allocated to impaired loans if the value of such loans is of conditions that constrain it from taking advantage of that right) to pledge or exchange deemed to be less than the unpaid balance. If these allocations cause the allowance the transferred costs, and (3) the Company does not maintain effective control over the for loan losses to require an increase, such increase is reported as a component of the transferred assets through an agreement to repurchase them before their maturity. provision for loan losses. The allowance consists of specific, general and unallocated components. The BANK OWNED LIFE INSURANCE specific component relates to loans that are classified either as doubtful, substandard Bank owned life insurance consists of investments in life insurance contracts. Earnings on or special mention. For such loans that are also classified as impaired, an allowance is the contracts are based on the earnings on the cash surrender value, less mortality costs. 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 EMPLOYEE STOCK OWNERSHIP PLAN component covers non-classified loans and is based on historical loss experience The Company accounts for its employee stock ownership plan (ESOP) in accordance adjusted for qualitative factors. An unallocated component is maintained to cover uncer- with AICPA Statement of Position (SOP) 93-6. Under SOP 93-6, the cost of shares issued tainties that could affect management’s estimate of probable losses. The unallocated to the ESOP, but not yet allocated to participants, are presented in the consolidated balance component of the allowance reflects the margin of imprecision inherent in the underlying sheets as a reduction of shareholders’ equity. Compensation expense is recorded based assumptions used in the methodologies for estimating specific and general losses in on the market price of the shares as they are committed to be released for allocation to the portfolio. participant accounts. The difference between the market price and the cost of shares Smaller-balance homogeneous loans are evaluated for impairment in total. Such committed to be released is recorded as an adjustment to additional paid-in capital. loans include residential first mortgage loans secured by one-to-four family residences, Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. residential construction loans, and automobile, manufactured homes, home equity and Dividends on unearned shares are used to reduce the accrued interest and principal second mortgage loans. Commercial and agricultural loans and mortgage loans secured amount of the ESOP’s loan payable to the Company. by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK borrower’s business are not adequate to meet its debt service requirements, the loan is The Company, in the normal course of business, makes commitments to make loans evaluated for impairment. Often this is associated with a delay or shortfall in payments which are not reflected in the consolidated financial statements. A summary of these of 90 days or more. Nonaccrual loans are often also considered impaired. Impaired commitments is disclosed in Note 15. loans, or portions thereof, are charged off when deemed uncollectible. GOODWILL FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS Goodwill is not amortized but is subject to an impairment test at least annually, or more Real estate properties and repossessed assets acquired through, or in lieu of, loan often if conditions indicate a possible impairment. foreclosure are initially recorded at the lower of cost or fair value, less selling costs at the date of foreclosure, establishing a new cost basis. Any reduction to fair value from SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE the carrying value of the related loan at the time of acquisition is accounted for as a The Company enters into sales of securities under agreements to repurchase with primary loan loss and charged against the allowance for loan losses. Valuations are periodically dealers only, which provide for the repurchase of the same security. Securities sold under performed by management and valuation allowances are adjusted through a charge agreements to purchase identical securities are collateralized by assets which are held to income for changes in fair value or estimated selling costs. INCOME TAXES in safekeeping in the name of the Bank or security by the dealers who arranged the transaction. Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase such securities are reflected as a liability. The securi- The Company records income tax expense based on the amount of taxes due on its ties underlying the agreements remain in the asset accounts of the Company. tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and EARNINGS PER COMMON SHARE liabilities, using enacted tax rates. A valuation allowance, if needed, reduces deferred Basic earnings per common share is based on the net income divided by the weighted tax assets to the amount expected to be realized. PREMISES AND EQUIPMENT average number of common shares outstanding during the period. Allocated ESOP shares are considered outstanding for earnings per common share calculations as they are committed to be released; unearned ESOP shares are not considered outstanding. Land is carried at cost. Buildings, furniture, fixtures and equipment are carried at cost, less Diluted earnings per common share shows the dilutive effect of additional potential accumulated depreciation and amortization computed principally by using the straight-line method over the estimated useful lives of the assets, which range from 15 to 39 years for buildings and 3 to 7 years for furniture, fixtures and equipment. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. common shares issuable under stock options. 18 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMPREHENSIVE INCOME STOCK COMPENSATION Comprehensive income consists of net income and other comprehensive income. Other Expense for employee compensation under stock option plans is based on Accounting comprehensive income includes the net change in net unrealized gains and losses on Principles Board (APB) Opinion 25, with expense reported only if options are granted securities available for sale, net of reclassification adjustments and tax effects, and is below market price at grant date. also recognized as a separate component of shareholders’ equity. SFAS No. 123, Accounting for Stock Based Compensation, requires proforma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation for awards granted. Accordingly, the following proforma information presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option plans. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. Accordingly, no compensation cost was actually recognized for stock options during 2005, 2004 and 2003. The fair value of options granted during 2005, 2004 and 2003 is estimated using the following weighted-average information: risk-free interest rate of 4.23%, 4.12% and 3.53%, expected life of 7 years, expected dividends of 2.79%, 2.31% and 2.41% per year and expected stock price volatility of 20.63%, 21.94% and 22.54% per year, respectively. Net income (loss) as reported Proforma net income (loss) Reported earnings (loss) per common and common equivalent share: Basic Diluted Proforma earnings (loss) per common and common equivalent share: Basic Diluted 2005 2004 2003 $ $ $ (924,251 (1,078,377) (0.38) (0.38) (0.44) (0.44) $ $ $ 3,987,050 3,757,083 1.61 1.57 1.51 1.48 $ $ $ 3,397,004 3,253,603 1.37 1.36 1.32 1.30 NEW ACCOUNTING PRONOUNCEMENTS of stock compensation, requires estimation of forfeitures when determining expense, In May 2005, the Financial Accounting Standards Board issued Statement of Financial and requires that excess tax benefits be shown as financing cash inflows versus a Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections. This reduction of taxes paid in the statement of cash flows. Various other changes are also Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. required. This Statement is effective beginning October 1, 2005, for the Company as 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 carries a result of recent SEC actions. Management believes the impact on the financial state- forward the guidance contained in Opinion 20 for reporting the correction of an error in ments will be similar to the disclosures made by footnote to the financial statements, previously issued financial statements and a change in accounting estimate. However, showing the effect on earnings and earnings per share of expensing the value of stock SFAS 154 changes the requirements for the accounting for and reporting of a change options granted. in accounting principle. Under this Statement, every voluntary change in accounting In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and principle requires retrospective application to prior periods’ financial statements, unless 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain it is impracticable. It also applies to changes required by an accounting pronouncement Investments. The FASB addresses the determination of when an investment is consid- in the unusual instance that the pronouncement does not include specific transition ered impaired, whether that impairment is other than temporary, and the measurement provisions. When a pronouncement includes specific transition provisions, those provi- of an impairment loss. The FSP also includes accounting considerations subsequent to sions should be followed. This Statement is effective for accounting changes and correc- the recognition of an other-than-temporary impairment and requires certain disclosures tions of errors made in fiscal years beginning after December 15, 2005, although earlier about unrealized losses that have not been recognized as other-than-temporary impair- application is permitted for changes and corrections made in fiscal years beginning after ments. The FSP amends FASB Statement No. 115, Accounting for Certain Investments June 1, 2005. The Company expects no significant effect on its financial statements as in Debt and Equity Securities, FASB Statement No. 124, Accounting for Certain a result of the adoption of this statement. Investments Held by Not-for-Profit Organizations and APB Opinion No. 18, The Equity In December 2004, the Financial Accounting Standards Board (FASB) issued Method of Accounting for Investments in Common Stock. The FSP nullifies certain Statement of Financial Accounting Standard No. 123R, Share-Base Payment. This requirements of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment Statement revises SFAS Statement No. 123, Accounting for Stock-Based Compensation, and Its Application to Certain Investments and supersedes EITF Abstracts, Topics D-44, amends SFAS Statement No. 95, Statement of Cash Flows, and supersedes APB Opinion Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security No. 125, Accounting for Stock Issued to Employees. It requires that all stock-based Whose Cost Exceeds Fair Value. The FSP is required to be applied to reporting periods compensation now be measured at fair value and recognized as expense in the income beginning after December 15, 2005. The Company does not expect adoption to have a statement. This Statement also clarifies and expands guidance on measuring fair value material impact on the consolidate financial statements. 19 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. EARNINGS PER COMMON SHARE A reconciliation of the numerators and denominators used in the computation of basic earnings per common share and diluted earnings per common share is presented below: Basic earnings (loss) per common share: Numerator, net income (loss) Denominator, weighted average common shares outstanding Less weighted average unallocated ESOP shares Weighted average common shares outstanding Basic earnings (loss) per common share Diluted earnings (loss) per common share: Numerator, net income (loss) Denominator, weighted average common shares outstanding for basic earnings per common share Add dilutive effects of assumed exercises of stock options, net of tax benefits Weighted average common and dilutive potential common shares outstanding Diluted earnings (loss) per common share 2005 2004 2003 $ $ $ $ $ $ (924,251) $ 3,987,050 $ 3,397,004 2,497,954 (37,063) 2,460,891 (0.38) (924,251) 2,460,891 - 2,460,891 (0.38) $ $ $ $ $ 2,498,403 (16,724) 2,481,679 1.61 3,987,050 2,481,679 52,744 2,534,423 1.57 $ $ $ $ $ 2,485,088 (13,797) 2,471,291 1.37 3,397,004 2,471,291 33,654 2,504,945 1.36 The calculation of the diluted loss per share for the year ended September 30, 2005 do not reflect the effect of the assumed exercise of stock options of 46,624 because the effect would have been anti-dilutive due to the net loss for the period. Stock options totaling 60,315, 91,315 and 58,566 shares were not considered in computing diluted earnings per common share for the years ended September 30, 2005, 2004 and 2003, respectively, because they were not dilutive. NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS return of 3.49% during its term. The investment in securities purchased under an agree- TO RESELL ment to resell matures weekly and the identical security is sold. Prior to reinvestment the In September 2005, Meta Payment Systems entered into a contract to assume the balance is reduced by an estimate of the amount that will be needed to cover gift card processing of a gift card portfolio. As part of the contract, the funds supporting the settlements the following week. The estimated amount, along with the previous week’s outstanding balances of the portfolio were invested in securities purchased under an interest, is wired to the Company. The securities purchased under this agreement are agreement to resell through Bank of America. The contract provides for a fixed rate of comprised of U.S. Government agency securities. 20 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. SECURITIES Year end securities available for sale were as follows: 2005 Debt securities: Trust preferred securities Obligations of states and political subdivisions Mortgage-backed securities Other Marketable equity securities 2004 Debt securities: Trust preferred securities Obligations of states and political subdivisions Mortgage-backed securities Other Marketable equity securities AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES $ $ $ $ 26,262,643 443,129 207,652,399 999,090 235,357,261 602,331 235,959,592 AMORTIZED COST 26,751,966 475,502 295,672,052 998,659 323,898,179 602,331 324,500,510 $ $ $ $ 109,645 349 31,615 14,320 155,929 277,814 433,743 GROSS UNREALIZED GAINS 112,275 6,432 761,354 54,141 934,202 302,218 1,236,420 $ $ $ $ (735,248) (2,609) (4,762,913) - (5,500,770) - (5,500,770) GROSS UNREALIZED LOSSES (872,231) - (2,341,122) - (3,213,353) - (3,213,353) FAIR VALUE 25,637,040 440,869 202,921,101 1,013,410 230,012,420 880,145 230,892,565 FAIR VALUE 25,992,010 481,934 294,092,284 1,052,800 321,619,028 904,549 322,523,577 $ $ $ $ Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at September 30, 2005 and 2004 are as follows: 2005 LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Debt securities: Trust preferred securities Obligations of states and political subdivisions Mortgage-backed securities $ - 290,520 43,671,997 $ 43,962,517 $ $ - (2,609) (699,413) (702,022) $24,027,396 - 157,847,666 $181,875,062 $ (735,248) - (4,063,500) $ (4,798,748) $ 24,027,396 290,520 201,519,663 $225,837,579 $ (735,248) (2,609) (4,762,913) $ (5,500,770) 2004 LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Debt securities: Trust preferred securities Mortgage-backed securities $ - 34,755,362 $ 34,755,362 $ $ - (204,451) (204,451) $23,879,735 196,459,639 $220,339,374 $ (872,231) (2,136,671) $ (3,008,902) $23,879,735 231,215,001 $255,094,736 $ (872,231) (2,341,122) $ (3,213,353) As of September 30, 2005, the investment portfolio included securities with current The amortized cost and fair value of debt securities by contractual maturity are shown unrealized losses which have existed for longer than one year. All of these securities are below. Certain securities have call features which allow the issuer to call the security considered to be acceptable credit risks. Because the declines in fair value were due to prior to maturity. Expected maturities may differ from contractual maturities in mortgage- changes in market interest rates, not in estimated cash flows, no other-than-temporary impairment was recorded at September 30, 2005. In addition, the Company has the backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore these securities are not included intent and ability to hold these investment securities for a period of time sufficient to in the maturity categories in the following maturity summary. Marketable equitable allow for an anticipated recovery. securities are not included in the following maturity summary. 21 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 Due in one year or less Due after one year through five years Due after ten years Mortgage-backed securities Activities related to the sale of securities available for sale are summarized below. Proceeds from sales Gross gains on sales Gross (losses) on sales NOTE 5. LOANS RECEIVABLE, NET Year-end loans receivable were as follows: One to four family residential mortgage loans Construction loans Commercial and multi-family real estate loans Agricultural real estate loans Commercial business loans Agricultural business loans Consumer loans Less: Allowance for loan losses Undistributed portion of loans in process Net deferred loan origination fees Activity in the allowance for loan losses for the years ended September 30 was as follows: Beginning balance Provision for loan losses Recoveries Charge-offs Ending balance Amortized Cost 296,110 1,146,109 26,262,643 27,704,862 207,652,399 235,357,261 $ $ Fair Value 295,363 1,158,916 25,637,040 27,091,319 202,921,101 230,012,420 $ $ 2005 2004 2003 $ $ 25,842,710 221,868 (241,202) $ - - - 90,473,567 342,871 (100,309) 2005 2004 $ $ $ $ 47,568,014 22,597,205 214,048,999 15,245,600 101,772,452 24,528,747 31,663,259 457,424,276 (7,222,404) (9,732,776) (278,851) 440,190,245 2004 4,961,777 488,500 29,210 (108,493) 5,370,994 $ $ $ $ 45,631,796 29,732,204 196,773,919 12,879,821 80,515,547 21,147,748 30,355,326 417,036,361 (5,370,994) (7,342,268) (271,720) 404,051,379 2003 4,692,988 350,000 32,148 (113,359) 4,961,777 2005 5,370,994 5,482,000 146,820 (3,777,410) 7,222,404 $ $ Virtually all of the Company’s originated loans are to Iowa and South Dakota-based The Company originates and purchases commercial real estate loans. These individuals and organizations. The Company’s purchased loans totaled approximately loans are considered by management to be of somewhat greater risk of uncollectibil- $60,968,000 at September 30, 2005, and were secured by properties located, as ity due to the dependency on income production. The Company’s commercial real a percentage of total loans, as follows: 1% in Washington, 1% in Colorado, 2% in estate loans include approximately $33,554,000 of loans secured by hotel properties Minnesota, 3% in Iowa, 2% in Arizona, 1% in Missouri and the remaining 3% in 12 and $45,566,000 of multi-family at September 30, 2005. The Company’s commer- other states. The Company’s purchased loans totaled approximately $91,713,000 at cial real estate loans includes approximately $39,409,000 of loans secured by hotel September 30, 2004, and were secured by properties located, as a percentage of properties and $39,362,000 of loans secured by multi-family at September 30, total loans, as follows: 6% in Washington, 1% in Colorado, 2% in Minnesota, 2% in 2004.The remainder of the commercial real estate portfolio is diversified by industry. Iowa, 1% in Wisconsin, 1% in South Dakota, 2% in Arizona, 1% in Missouri and the The Company’s policy for requiring collateral and guarantees varies with the credit- remaining 6% in 12 other states. worthiness of each borrower. 22 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired loans were as follows: Year-end impaired loans with no allowance for loan losses allocated Year-end impaired loans with allowance for loan losses allocated Amount of the allowance allocated to impaired loans Average of impaired loans during the year $ 2005 - 664,056 250,803 1,701,941 $ 2004 - 652,834 197,265 775,047 Interest income and cash interest collected on impaired loans was not material during the years ended September 30, 2005, 2004, and 2003. NOTE 6. LOAN SERVICING Loans serviced for others are not reported as assets. The unpaid principal balances of these loans at year end were as follows: Mortgage loan portfolios serviced for FNMA Other 2005 2004 $ $ 25,241,000 26,039,000 51,280,000 $ $ 25,804,000 27,460,000 53,264,000 Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $128,000 and $100,000 at September 30, 2005 and 2004, respectively. NOTE 7. PREMISES AND EQUIPMENT, NET Year end premises and equipment were as follows: Land Buildings Furniture, fixtures and equipment Less accumulated depreciation 2005 2004 $ $ 2,858,410 12,484,587 6,021,614 21,364,611 (6,238,542) 15,126,069 $ $ 2,108,388 9,577,962 5,243,724 16,930,074 (5,239,637) 11,690,437 Depreciation of premises and equipment included in occupancy and equipment expense was approximately $999,000, $917,000 and $893,000 for the years ended September 30, 2005, 2004 and 2003, respectively. NOTE 8. DEPOSITS NOTE 9. ADVANCES FROM FEDERAL HOME LOAN BANK Certificates of deposit in denominations of $100,000 or more were approximately At September 30, 2005 advances from the FHLB of Des Moines had fixed and variable $128,175,000 and $84,862,000 at September 30, 2005 and 2004, respectively. rates ranging from 2.15% to 7.19% (weighted-average rate of 4.56%) are required At September 30, 2005, the scheduled maturities of certificates of deposit were to be repaid in the year ending September 30 as presented below. Advances totaling as follows for the years ending September 30: $49,700,000 contain call features which allow the FHLB to call for the prepayment of the borrowing prior to maturity. 2006 2007 2008 2009 2010 Thereafter $ 170,304,440 60,216,568 19,142,377 9,221,728 8,951,641 285,342 2006 2007 2008 2009 2010 $ 268,122,096 Thereafter $ 42,140,000 25,265,000 25,000,000 30,000,000 20,000,000 17,300,000 $ 159,705,000 Borrowed funds at September 30, 2004 included borrowings from the FHLB of $226,250,000. Such borrowings carried a weighted-average interest rate of 3.62% with maturities ranging from 2005 through 2019. MetaBank and MBWC have executed blanket pledge agreements whereby MetaBank and MBWC assign, transfer and pledge to the FHLB and grant to the FHLB a security interest in all mortgage collateral and securities collateral. However, MetaBank 23 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and MBWC have the right to use, commingle and dispose of the collateral they have accumulated and unpaid distributions are required to be paid. The capital securities are assigned to the FHLB. Under the agreements, MetaBank and MBWC must maintain required to be redeemed on July 25, 2031; however, the Company has the option to “eligible collateral” that has a “lending value” at least equal to the “required collateral shorten the maturity date to a date not earlier than July 25, 2006. The redemption price amount,” all as defined by the agreements. is $1,000 per capital security plus any accrued and unpaid distributions to the date of At year end 2005 and 2004, MetaBank and MBWC collectively pledged securities redemption plus, if redeemed prior to July 25, 2011, a redemption premium as defined with amortized costs of $105,947,000 and $169,159,000, respectively, and fair values in the Indenture agreement. of approximately $103,397,000 and $167,922,000, respectively, against specific FHLB Holders of the capital securities have no voting rights, are unsecured and rank junior advances. In addition, qualifying mortgage loans of approximately $89,815,000 and in priority of payment to all of the Company’s indebtedness and senior to the Company’s $119,731,000 were pledged as collateral at September 30, 2005 and 2004, respectively. common stock. NOTE 10. SECURITIES SOLD UNDER AGREEMENTS stockholders’ equity, the securities are treated as capital for regulatory purposes, subject Although the securities issued by the Trusts are not included as a component of TO REPURCHASE to certain limitations. Securities sold under agreements to repurchase totaled $20,507,051 and $32,549,377 at September 30, 2005 and 2004, respectively. NOTE 12. EMPLOYEE BENEFITS An analysis of securities sold under agreements to repurchase is as follows: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Highest month-end balance Average balance Weighted average interest rate during the period Weighted average interest rate at end of period 2005 2004 $ 33,077,141 28,066,924 $ 58,500,000 38,977,080 2.78% 2.89% 1.71% 2.49% The Company maintains an ESOP for eligible employees who have 1,000 hours of employ- ment with the Bank, have worked one year at the Bank and who have attained age 21. In 2001, the ESOP borrowed $360,000 from the Company to purchase 30,000 shares of the Company’s common stock. Final payment of this loan was received during the year ended September 30, 2005. In 2003, the ESOP borrowed $608,584 from the Company to purchase 35,574 shares of the Company’s common stock. In 2004, the ESOP borrowed $212,400 from the Company to purchase 10,000 shares of the Company’s common stock. In 2005, the ESOP borrowed $684,133 from the Company to purchase 30,000 At year-end 2005, securities sold under agreements to repurchase had a weighted shares of the Company’s common stock. Shares purchased by the ESOP are held in sus- average maturity of less than 13 months. pense for allocation among participants as the loan is repaid. ESOP expense of $305,068, The Company pledged securities with amortized costs of approximately $291,018 and $263,055 was recorded for the years ended September 30, 2005, 2004 $22,312,000 and $35,702,000 and fair values of approximately $21,931,000 and and 2003, respectively. Contributions of $253,842, $219,310 and $253,050 were made $36,022,000, respectively, at year-end 2005 and 2004 as collateral for securities to the ESOP during the years ended September 30, 2005, 2004 and 2003, respectively. sold under agreements to repurchase. Contributions to the ESOP and shares released from suspense in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants NOTE 11. JUNIOR SUBORDINATED DEBENTURES on the basis of compensation in the year of allocation. Benefits generally become 100% AND TRUST PREFERRED SECURITIES vested after seven years of credited service. Prior to the completion of seven years of Subordinated debentures are due to First Midwest Financial Capital Trust I, a 100% credited service, a participant who terminates employment for reasons other than death owned non-consolidated subsidiary of the Company. The debentures were issued in or disability receives a reduced benefit based on the ESOP’s vesting schedule. Forfeitures 2001 in conjunction with the Trust’s issuance of 10,000 shares of Company Obligated are reallocated among remaining participating employees, in the same proportion as Mandatory Redeemable Trust Preferred Securities. The debentures bear the same inter- contributions. Benefits are payable in the form of stock upon termination of employment. est rate and terms as the trust preferred securities, detailed following. The debentures The Company’s contributions to the ESOP are not fixed, so benefits payable under the are included on the balance sheet as liabilities. ESOP cannot be estimated. The Company issued all of the 10,000 authorized shares of trust preferred securities For the years ended September 30, 2005, 2004 and 2003, 14,000, 13,000 and of First Midwest Financial Capital Trust I holding solely subordinated debt securities. 15,000 shares with an average fair value of $21.79, $22.37 and $17.54 per share, Distributions are paid semi-annually. Cumulative cash distributions are calculated at a respectively, were committed to be released. Also for the years ended September 30, variable rate of LIBOR (as defined) plus 3.75% (7.67% at September 30, 2005 and 2005, 2004 and 2003, allocated shares and total ESOP shares reflect 45,042, 15,056 5.74% at September 30, 2004), not to exceed 12.5%. The Company may, at one or and 4,865 shares, respectively, withdrawn from the ESOP by participants who are no more times, defer interest payments on the capital securities for up to 10 consecutive longer with the Company or by participants diversifying their holdings and 5,152, 5,426 semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all and 6,569 shares, respectively, purchased for dividend reinvestment. 24 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year-end ESOP shares are as follows: Allocated shares Unearned shares Total ESOP shares 2005 229,928 36,812 266,740 2004 255,818 20,812 276,630 2003 252,448 23,812 276,260 Fair value of unearned shares $ 686,912 $ 462,859 $ 525,055 STOCK OPTIONS AND INCENTIVE PLANS equity interest. Options are issued for 10 year periods, with 100% vesting generally Certain officers and directors of the Company have been granted options to purchase occurring either at grant date or 48 months after grant date. At September 30, 2005, common stock of the Company pursuant to stock option plans. Stock option plans are 91,862 shares were authorized for future grants. Information about option grants used to reward directors, officers and employees and provide them with an additional follows: Outstanding, September 30, 2002 Granted Exercised Forfeited Outstanding, September 30, 2003 Granted Exercised Forfeited Outstanding, September 30, 2004 Granted Exercised Forfeited Outstanding, September 30, 2005 Number of Options 251,173 36,708 (35,292) - 252,589 93,315 (36,546) (2,000) 307,358 21,600 (13,630) (4,000) 311,328 Weighted- Average Exercise Price $ $ 13.88 21.45 6.67 - 15.99 22.46 15.94 15.92 17.96 18.87 16.01 17.88 18.11 The weighted-average fair value per option for options granted in 2005, 2004 and 2003 was $3.96, $5.37 and $4.81, respectively. At September 30, 2005, options outstanding were as follows: Exercise Price $9.63 - $9.99 $10.00 - $14.99 $15.00 - $19.99 $20.00 - $23.81 Options exercisable at year end are as follows: Weighted-Average Exercise Price $ 9.63 13.69 17.26 22.17 18.11 Weighted-Average Remaining Life (Years) 5.00 5.79 3.28 8.25 5.99 Number of Options 20,324 62,474 97,717 130,813 311,328 2003 2004 2005 Number of Options 236,464 250,483 260,453 Weighted- Average Exercise Price $15.99 17.04 17.32 PROFIT SHARING PLAN The Company has a profit sharing plan covering substantially all full-time employees. Contribution expense for the years ended September 30, 2005, 2004 and 2003, was $233,453, $276,923 and $283,212, respectively. 25 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. INCOME TAXES The Company, the Bank and its subsidiaries and MBWC file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes consists of: Federal: Current Deferred State: Current Deferred 2005 2004 2003 $ 115,151 $ 2,120,464 $ 1,430,109 (670,140) (554,989) (46,076) (83,620) (129,696) (333,905) 1,786,559 288,092 (15,953) 272,139 (23,962) 1,406,147 278,015 (5,876) 272,139 Income tax expense (benefit) $ (684,685) $ 2,058,698 $ 1,678,286 Total income tax expense (benefit) differs from the statutory federal income tax rate as follows: Income taxes (benefit) at 35% federal tax rate Increase (decrease) resulting from: State income taxes - net of federal benefit Nontaxable buildup in cash surrender value Other, net Total income tax expense (benefit) Year-end deferred tax assets and liabilities consist of: Deferred tax assets: Bad debts Net unrealized losses on securities available for sale Other Deferred tax liabilities: Federal Home Loan Bank stock dividend Premises and equipment Deferred loan fees $ $ 2005 2004 2003 (563,000) $ 2,116,000 $ 1,776,000 (26,000) (165,000) 69,315 (684,685) $ $ $ $ 191,000 (186,000) (62,302) 2,058,698 2005 2,694,000 1,886,420 75,589 4,656,009 (452,000) (463,000) (150,000) (1,065,000) 141,000 (190,000) (48,714) 1,678,286 2004 1,885,000 735,629 146,829 2,767,458 (452,000) (461,000) (168,000) (1,081,000) Net deferred tax assets $ 3,591,009 $ 1,686,458 Federal income tax laws provided savings banks with additional bad debt deductions that, if undertaken, could have a direct material effect on the financial statements. Under through September 30, 1987, totaling $6,744,000 for the Bank. Accounting standards capital adequacy guidelines and the regulatory framework for prompt corrective action, do not require a deferred tax liability to be recorded on this amount, which liability other- MetaBank and MBWC must meet specific quantitative capital guidelines using their wise would total approximately $2,300,000 at September 30, 2005 and 2004. If the assets, liabilities and certain off-balance-sheet items as calculated under regulatory Bank were liquidated or otherwise ceases to be a bank or if tax laws were to change, accounting practices. The requirements are also subject to qualitative judgments by the the $2,300,000 would be recorded as expense. regulators about components, risk weightings and other factors. NOTE 14. CAPITAL REQUIREMENTS AND RESTRICTIONS MetaBank and MBWC to maintain minimum amounts and ratios (set forth in the table ON RETAINED EARNINGS below) of total risk-based capital and Tier I capital (as defined in the regulations) to risk- The Company has two primary subsidiaries, MetaBank and MBWC. MetaBank and weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) MBWC are subject to various regulatory capital requirements. Failure to meet minimum to average assets (as defined). Management believes, as of September 30, 2005, that capital requirements can initiate certain mandatory or discretionary actions by regulators MetaBank and MBWC meet the capital adequacy requirements. Quantitative measures established by regulation to ensure capital adequacy require 26 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MetaBank’s and MBWCs’s actual capital and required capital amounts and ratios are presented below: Dollars in thousands) AS OF SEPTEMBER 30, 2005: Total capital (to risk-weighted assets): MetaBank MetaBank West Central Tier 1 (Core) capital (to risk-weighted assets): MetaBank MetaBank West Central Tier 1 (Core) capital (to average total assets): MetaBank MetaBank West Central Tier 1 (Core) capital (to total assets), MetaBank AS OF SEPTEMBER 30, 2004: Total capital (to risk-weighted assets): First Federal Security Tier 1 (Core) capital (to risk-weighted assets): First Federal Security Tier 1 (Core) capital (to average total assets): First Federal Security Tier 1 (Core) capital (to total assets), First Federal ACTUAL CAPITAL ADEQUACY PURPOSES MINIMUM TO BE WELL CAPITALIZED FOR PROMPT CORRECTIVE ACTION PROVISIONS Amount Ratio Amount Ratio Amount Ratio $ $ 52,857 4,162 46,412 3,762 46,412 3,762 46,412 53,716 4,646 48,493 4,419 48,493 4,419 48,493 10.3% 13.0 $ 9.1 11.8 6.5 7.4 6.4 11.2% 14.5 $ 10.1 13.8 6.8 7.1 6.8 40,944 2,566 20,472 1,277 28,405 2,042 29,065 38,480 2,570 19,240 1,285 28,470 2,485 28,655 $ 8.0% 8.0 4.0 4.0 4.0 4.0 4.0 $ 8.0% 8.0 4.0 4.0 4.0 4.0 4.0 51,180 3,208 30,708 1,915 35,507 2,553 36,332 48,099 3,213 28,860 1,928 35,588 3,106 35,819 10.0% 10.0 6.0 6.0 5.0 5.0 5.0 10.0% 10.0 6.0 6.0 5.0 5.0 5.0 Regulations limit the amount of dividends and other capital distributions that may be paid $2,000,000 with an interest rate of 6.5%. Commitments, which are disbursed subject to by a financial institution without prior approval of its primary regulator. The regulatory certain limitations, extend over various periods of time. Generally, unused commitments are restriction is based on a three-tiered system with the greatest flexibility being afforded to canceled upon expiration of the commitment term as outlined in each individual contract. well-capitalized (Tier 1) institutions. MetaBank and MBWC are currently Tier 1 institutions. The exposure to credit loss in the event of nonperformance by other parties to finan- Accordingly, MetaBank and MBWC can make, without prior regulatory approval, distribu- cial instruments for commitments to extend credit is represented by the contractual tions during a calendar year up to 100% of their retained net income for the calendar amount of those instruments. The same credit policies and collateral requirements are year-to-date plus retained net income for the previous two calendar years (less any divi- used in making commitments and conditional obligations as are used for on-balance- dends previously paid) as long as they remain well-capitalized, as defined in prompt cor- sheet instruments. rective action regulations, following the proposed distribution. Accordingly, at September Since certain commitments to make loans and to fund lines of credit and loans in 30, 2005, approximately $4,052,000 of MetaBank’s retained earnings and none of process expire without being used, the amount does not necessarily represent future MBWC’s retained earnings were potentially available for distribution to the Company. cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in NOTE 15. COMMITMENTS AND CONTINGENCIES the contract. In the normal course of business, the Company’s subsidiary banks make various Securities with amortized costs of approximately $65,314,000 and $47,201,000 commitments to extend credit which are not reflected in the accompanying consolidated and fair values of approximately $63,313,000 and $46,098,000 at September 30, 2005 financial statements. and 2004, respectively, were pledged as collateral for public funds on deposit. Securities At September 30, 2005 and 2004, loan commitments approximated $69,648,000 with amortized costs of approximately $13,567,000 and $10,255,000 and fair values and $60,244,000, respectively, excluding undisbursed portions of loans in process. Loan of approximately $13,400,000 and $10,296,000 at September 30, 2005 and 2004, commitments at September 30, 2005 included commitments to originate fixed-rate loans respectively, were pledged as collateral for individual, trust and estate deposits. with interest rates ranging from 5.38% to 7.0% totaling $2,833,000 and adjustable-rate Under employment agreements with certain executive officers, certain events leading loan commitments with interest rates ranging from 4.75% to 18% totaling $63,545,000. The Company also had commitments to purchase a fixed-rate loan of $2,000,000 with to separation from the Company could result in cash payments totaling approximately $2,235,000 as of September 30, 2005. an interest rate of 7.5% and adjustable rate loans of $1,270,000 with an interest rate of The Company and its subsidiaries are subject to certain claims and legal actions 7.625%. Loan commitments at September 30, 2004 included commitments to originate arising in the ordinary course of business. In the opinion of management, after consulta- fixed-rate loans with interest rates ranging from 4% to 9% totaling $8,150,000 and tion with legal counsel, the ultimate disposition of these matters is not expected to have adjustable-rate loan commitments with interest rates ranging from 3.88% to 18% totaling a material adverse effect on the consolidated financial position or results of operations $50,094,000. The Company also had commitments to purchase a fixed-rate loan of of the Company. 27 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows: Net change in net unrealized gains and losses on securities available for sale: Unrealized gains (losses) arising during the year Reclassification adjustment for (gains) losses included in net income Net change in unrealized gains and losses on securities available for sale Tax effects $ $ (3,109,428) 19,334 (3,090,094) 1,149,825 $ 2,848,264 - 2,848,264 (1,059,840) (5,369,149) (242,562) (5,611,711) 2,088,115 Other comprehensive income (loss) $ (1,940,269) $ 1,788,424 $ (3,523,596) 2005 2004 2003 NOTE 17. LEASE COMMITMENT The Company has leased property under various noncancelable operating lease agree- ments which expire at various times through October 2013, and require annual rentals ranging from $6,000 to $52,200 plus the payment of the property taxes, normal mainte- nance and insurance on the property. The total minimum rental commitment at September 30, 2005, under the leases is as follows: 2006 2007 2008 2009 2010 Thereafter $ $ 99,140 99,580 99,015 92,800 62,350 160,950 613,835 NOTE 18. SEGMENT REPORTING products and services, primarily to third parties, including financial institutions and other An operating segment is generally defined as a component of a business for which discrete businesses. These products and services include issuance of prepaid cards, issuance financial information is available and whose results are reviewed by the chief operating of credit cards, sponsorship of ATMs into the debit networks, ACH origination services decision-maker. The Company has determined that it has two reportable segments: The and a gift card program. Other related programs are in the process of development. traditional banking segment consists of its two banking subsidiaries, MetaBank and The remaining grouping under the caption “All Others” consists of the operations of the MetaBank West Central, and Meta Payment Systems, a division of MetaBank. MetaBank Meta Financial Group, Inc. and Meta Trust Company. and MetaBank West Central operate as traditional community banks providing deposit, Transactions between affiliates, the resulting revenues of which are shown in the loan and other related products to individuals and small businesses, primarily in the com- intersegment revenue category, are conducted at market prices, meaning prices that munities where their offices are located. Meta Payment Systems provides a number of would be paid if the companies were not affiliates. 28 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 2005 Revenues from external customers: Interest income Noninterest income Inter-segment revenue Interest expense Provision for loan and lease losses Depreciation expense Other noninterest expense Segment income (loss) from continuing operations before income taxes Segment assets YEAR ENDED SEPTEMBER 30, 2004 Revenues from external customers: Interest income Noninterest income Inter-segment revenue Interest expense Provision for loan and lease losses Depreciation expense Other noninterest expense Segment income (loss) from continuing operations before income taxes Segment assets YEAR ENDED SEPTEMBER 30, 2003 Revenues from external customers: Interest income Noninterest income Inter-segment revenue Interest expense Provision for loan and lease losses Depreciation expense Other noninterest expense Segment income (loss) from continuing operations before income taxes Segment assets TRADITIONAL BANKING PAYMENT SYSTEMS ALL OTHERS TOTAL $ $ $ $ $ $ 40,779,232 2,002,364 262,843 21,229,473 5,482,000 961,710 14,126,062 1,245,193 703,874,252 35,902,412 3,448,192 549,957 17,892,050 488,500 907,894 12,609,174 8,002,880 778,689,059 34,898,575 3,405,052 521,472 18,919,805 350,000 893,228 12,480,826 6,181,239 770,883,332 $ $ $ 49,451 1,591,031 358,947 5,224 - 37,196 3,202,646 (1,245,636) 70,905,966 7 6,747 - 3,200 - 9,139 761,470 (766,991) 145,353 - - - - - - - - - 297,149 104,688 6,606 761,799 - - 1,255,137 (1,608,493) 54,405,761 317,634 101,033 - 634,084 - - 974,724 (1,190,141) 60,199,249 334,656 95,926 - 644,385 - - 892,146 $ $ $ 41,125,832 3,698,083 628,396 21,996,496 5,482,000 998,906 18,583,845 (1,608,936) 829,185,979 36,220,053 3,555,972 549,957 18,529,334 488,500 917,033 14,345,368 6,045,748 839,033,661 35,233,231 3,500,978 521,472 19,564,190 350,000 893,228 13,372,972 (1,105,949) 55,742,263 5,075,290 826,625,595 29 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REVENUES FOR THE YEAR ENDED SEPTEMBER 30: Interest income for reportable segments Noninterest income for reportable segments Intersegment revenues for reportable segments Other revenues Elimination of intersegment revenues Total consolidated revenues INTEREST EXPENSE FOR THE YEAR ENDED SEPTEMBER 30: Interest expense for reportable segments Other interest expense Elimination of intersegment interest expense NONINTEREST EXPENSE FOR THE YEAR ENDED SEPTEMBER 30: Noninterest expense for reportable segments Other noninterest expense Depreciation expense Elimination of intersegment interest expense INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) FOR YEAR ENDED SEPTEMER 30: Total income (loss) for reportable segments Other loss Elimination of intersegment profit (loss) Income (loss) before income taxes ASSETS AS OF SEPTEMBER 30: Total assets for reportable segments Other assets Elimination of intersegment receivables Other intersegment eliminations Total consolidated assets 2005 2004 2003 $ $ $ $ $ $ $ $ $ 40,828,683 3,593,395 621,790 408,443 (628,396) 44,823,915 21,234,697 761,799 (142,703) 21,853,793 17,328,708 1,255,137 998,906 (485,693) 19,097,058 (443) (1,608,493) - (1,608,936) 774,780,218 54,405,761 (50,598,010) (2,239,027) $ $ $ $ $ $ $ $ $ 35,902,419 3,454,939 549,957 418,667 (549,957) 39,776,025 17,895,250 634,084 (118,149) 18,411,185 13,370,644 974,724 917,033 (431,809) 14,830,592 7,235,889 (1,190,141) - 6,045,748 778,834,412 60,199,249 (55,093,854) (3,141,283) $ $ $ $ $ $ $ $ $ 34,898,575 3,405,052 521,472 430,582 (521,472) 38,734,209 18,919,805 644,385 (113,439) 19,450,751 12,480,826 892,146 893,228 (408,032) 13,858,168 6,181,239 (1,105,949) - 5,075,290 770,883,332 55,742,263 (50,832,668) (3,507,800) $ 776,348,942 $ 780,798,524 $ 772,285,127 30 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. PARENT COMPANY FINANCIAL STATEMENTS Presented below are condensed financial statements for the parent company, Meta Financial Group, Inc.: CONDENSED BALANCE SHEETS SEPTEMBER 30, 2005 AND 2004 ASSETS Cash and cash equivalents Securities available for sale Investment in subsidiaries Loan receivable from ESOP Loan receivable Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Loan payable to subsidiaries Subordinated debentures Accrued expenses and other liabilities Total liabilities SHAREHOLDERS’ EQUITY Common stock Additional paid-in capital Retained earnings, substantially restricted Accumulated other comprehensive (loss) Unearned Employee Stock Ownership Plan shares Treasury stock, at cost Total shareholders’ equity Total liabilities and shareholders’ equity $ $ $ 2005 2004 $ 51,676 2,177,472 50,598,010 825,057 - 1,224,682 110,119 2,625,894 55,093,854 394,766 1,261,188 856,789 54,876,897 $ 60,342,610 $ 1,200,000 10,310,000 408,207 2,550,000 10,310,000 208,345 11,918,207 13,068,345 29,580 20,646,513 34,557,258 (3,180,607) (825,057) (8,268,997) 29,580 20,678,644 36,758,258 (1,240,338) (394,766) (8,557,113) 42,958,690 47,274,265 $ 54,876,897 $ 60,342,610 31 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 Dividend income from subsidiaries Interest income Gain on sales of securities available for sale, net Interest expense Operating expenses Income (loss) before income taxes and equity in undistributed net income of subsidiaries Income tax (benefit) Income (loss) before equity in undistributed net income of subsidiaries $ 2005 2004 2003 $ 2,510,000 303,755 - 2,813,755 761,799 1,060,084 1,821,883 991,872 (503,000) 1,494,872 $ 2,300,000 317,635 - 2,617,635 634,083 752,257 1,386,340 1,231,295 (354,000) 1,585,295 1,250,000 334,656 48,109 1,632,765 644,385 662,046 1,306,431 326,334 (304,000) 630,334 Equity in undistributed net income (loss) of subsidiaries (2,419,123) 2,401,755 2,766,670 Net income (loss) $ (924,251) $ 3,987,050 $ 3,397,004 CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in undistributed net (income) loss of subsidiaries (Loss) on sales of securities available for sale, net Change in other assets Change in accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiary Maturity of securities Purchase of securities available for sale Proceeds from sales of securities available for sale Loan to ESOP Net change in loan receivable Repayments on loan receivable from ESOP Net cash provided by (used in) investment activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loan payable to subsidiaries Repayments on loan payable to subsidiaries Cash dividends paid Proceeds from exercise of stock options Purchase of treasury stock Net cash (used in) financing activities 2005 2004 2003 $ (924,251) $ 3,987,009 $ 3,397,004 2,419,123 - (367,893) 180,671 1,307,650 (275,000) 500,000 - - (684,133) 1,261,188 253,842 1,055,897 - (1,350,000) (1,276,749) 230,414 (25,655) (2,421,990) (2,401,755) - 365,401 (70,908) 1,879,747 - - - - (212,400) 46,071 219,310 52,981 2,325,000 (2,675,000) (1,286,533) 582,557 (906,650) (1,960,626) (2,766,670) (48,109) (465,296) 233,718 350,647 - - (48,325) 156,016 (608,584) 42,284 253,050 (205,559) 1,975,000 (830,000) (1,279,911) 235,281 (165,092) (64,722) Net change in cash and cash equivalents (58,443) (27,898) 80,366 CASH AND CASH EQUIVALENTS Beginning of year End of year 110,119 51,676 $ 138,017 110,119 $ 57,651 138,017 $ The extent to which the Company may pay cash dividends to shareholders will depend on the cash currently available at the Company, as well as the ability of the subsidiary banks to pay dividends to the Company (see Note 14). 32 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) FISCAL YEAR 2005: Total interest income Total interest expense Net interest income Provision for loan losses Net income (loss) Earnings (loss) per common and common equivalent share: Basic Diluted FISCAL YEAR 2004: Total interest income Total interest expense Net interest income Provision for loan losses Net income Earnings (loss) per common and common equivalent share: Basic Diluted FISCAL YEAR 2003: Total interest income Total interest expense Net interest income Provision for loan losses Net income Earnings per common and common equivalent share: Basic Diluted QUARTER ENDED December 31 March 31 June 30 September 30 $ $ $ $ $ $ 9,784,691 5,097,674 4,687,017 177,000 441,942 0.18 0.18 9,053,707 4,585,909 4,467,798 101,000 976,942 0.39 0.39 8,952,749 5,027,183 3,925,566 175,000 844,256 0.34 0.34 $ $ $ $ $ $ 10,372,608 5,383,453 4,989,155 257,500 399,374 0.16 0.16 8,890,641 4,475,826 4,414,815 56,000 1,675,397 0.67 0.67 9,001,683 4,854,739 4,146,944 108,000 915,186 0.37 0.37 $ $ $ $ $ $ 10,812,675 5,697,041 5,115,634 4,956,000 (2,311,994) (0.94) (0.94) 9,043,212 4,523,366 4,519,846 167,500 836,609 0.34 0.34 8,773,197 4,841,730 3,931,467 67,000 892,407 0.36 0.36 $ $ $ $ $ $ 10,123,334 5,675,625 4,447,709 91,500 546,427 0.22 0.22 9,192,696 4,826,084 4,366,612 164,000 498,102 0.20 0.20 8,451,524 4,727,099 3,724,425 - 745,155 0.30 0.30 NOTE 21. FAIR VALUES OF FINANCIAL INSTRUMENTS recognized over time through the normal course of operations. Additionally, a substantial SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that portion of the Company’s inherent value is the subsidiary banks’ capitalization and the Company disclose estimated fair value amounts of its financial instruments. It is franchise value. Neither of these components have been given consideration in the management’s belief that the fair values presented below are reasonable based on the presentation of fair values below. valuation techniques and data available to the Company as of September 30, 2005 and The following presents the carrying amount and estimated fair value of the financial 2004, as more fully described below. The operations of the Company are managed from instruments held by the Company at September 30, 2005 and 2004. This information is a going concern basis and not a liquidation basis. As a result, the ultimate value realized presented solely for compliance with SFAS No. 107 and is subject to change over time for the finan-cial instruments presented could be substantially different when actually based on a variety of factors. Financial assets: Cash and cash equivalents Securities purchased under agreements to resell Securities available for sale Loans receivable, net Loans held for sale FHLB stock Accrued interest receivable Financial liabilities: Noninterest bearing demand deposits Savings, NOW and money market demand deposits Other time certificates of deposit Total deposits Advances from FHLB Securities sold under agreements to repurchase Subordinated debentures Advances from borrowers for taxes and insurance Accrued interest payable 2005 2004 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ $ 14,369,754 37,513,348 230,892,565 440,190,245 306,000 8,161,000 4,240,694 (102,164,156) (170,484,053) (268,122,096) (540,770,305) (159,705,000) (20,507,051) (10,310,000) (271,273) (941,935) $ 14,370,000 37,513,000 230,893,000 434,521,000 306,000 8,161,000 4,241,000 (102,164,000) (170,484,000) (265,828,000) (538,476,000) (160,675,000) (20,340,000) (10,336,000) (271,000) (942,000) $ 8,936,569 - 322,523,577 404,051,379 270,000 11,052,700 3,849,215 (19,537,370) (177,287,972) (264,755,535) (461,580,877) (226,250,000) (32,549,377) (10,310,000) (216,331) (473,426) 8,937,000 - 322,524,000 400,965,000 270,000 11,053,000 3,849,000 (19,537,000) (177,288,000) (265,836,000) (462,661,000) (236,265,000) (33,074,000) (10,339,000) (216,000) (473,000) Off-balance-sheet instruments, loan commitments - - - - 33 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following sets forth the methods and assumptions used in determining the fair value ADVANCES FROM FHLB estimates for the Company’s financial instruments at September 30, 2005 and 2004. The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates as of September 30, 2005 and 2004, for advances CASH AND CASH EQUIVALENTS with similar terms and remaining maturities. The carrying amount of cash and short-term investments is assumed to approximate the fair value. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES SECURITIES PURCHASED UNDER AGREEMENT TO RESELL The fair value of these instruments was estimated by discounting the expected future The carrying amount of securities purchased under agreement to resell is assumed cash flows using derived interest rates approximating market as of September 30, 2005 to approximate the fair value. and 2004, over the contractual maturity of such borrowings. SECURITIES AVAILABLE FOR SALE ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE Quoted market prices or dealer quotes were used to determine the fair value of The carrying amount of advances from borrowers for taxes and insurance is assumed securities available for sale. to approximate the fair value. LOANS RECEIVABLE, NET ACCRUED INTEREST PAYABLE The fair value of loans was estimated by discounting the future cash flows using the The carrying amount of accrued interest payable is assumed to approximate the current rates at which similar loans would be made to borrowers with similar credit fair value. ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms LOAN COMMITMENTS and conditions and discounted at a target rate at which similar loans would be made The commitments to originate and purchase loans have terms that are consistent with to borrowers as of September 30, 2005 and 2004. In addition, when computing the current market terms. Accordingly, the Company estimates that the fair values of these estimated fair value for all loans, allowances for loan losses have been subtracted from commitments are not significant. the calculated fair value for consideration of credit issues. LIMITATIONS LOANS HELD FOR SALE It must be noted that fair value estimates are made at a specific point in time, based Fair values are based on quoted market prices of similar loans sold on the on relevant market information about the financial instrument. Additionally, fair value secondary market. FHLB STOCK estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. The fair value of such stock approximates book value since the Company is able These estimates do not reflect any premium or discount that could result from offering to redeem this stock with the Federal Home Loan Bank at par value. the Company’s entire holdings of a particular financial instrument for sale at one time. ACCRUED INTEREST RECEIVABLE Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experi- The carrying amount of accrued interest receivable is assumed to approximate ence, current economic conditions, risk characteristics of various financial instruments, the fair value. DEPOSITS The fair value of deposits were determined as follows: (i) for noninterest bearing demand and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair deposits, savings, NOW and money market demand deposits, since such deposits are value estimates are not intended to represent the underlying value of the Company, on immediately withdrawable, fair value is determined to approximate the carrying value either a going concern or a liquidation basis. (the amount payable on demand); (ii) for other time certificates of deposit, the fair value has been estimated by discounting expected future cash flows by the current rates offered as of September 30, 2005 and 2004, on certificates of deposit with similar remaining maturities. In accordance with SFAS No. 107. no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under SFAS No. 107. 34 BOARD OF DIRECTORS James S. Haahr Brad C. Hanson Chairman of the Board for Meta Financial Group, MetaBank, and Executive Vice President for Meta Financial Group and MetaBank and MetaBank West Central E. Wayne Cooley President of Meta Payment Systems G. Mark Mickelson Consultant Emeritus of the Iowa Girls’ High School Athletic Union Partner with Mickelson & Newell, LLC E. Thurman Gaskill Rodney G. Muilenburg Iowa State Senator and Grain and Livestock Farming Operation Owner Retired Dairy Specialist Manager for Purina Mills, Inc.; Consultant for J. Tyler Haahr President and Chief Executive Officer for Meta Financial Group and TransOva Genetics Dairy Division; and Director of Sales and Marketing for TransOva Genetics MetaBank, Chief Executive Officer for MetaBank West Central, and Jeanne Partlow President of Meta Trust Retired Chairman of the Board and President of Iowa Savings Bank SENIOR OFFICERS James S. Haahr Ben Guenther Chairman of the Board for Meta Financial Group, MetaBank, and President of MetaBank Northwest Iowa Market MetaBank West Central J. Tyler Haahr President and Chief Executive Officer for Meta Financial Group and MetaBank, Chief Executive Officer for MetaBank West Central, and President of Meta Trust Troy Moore Executive Vice President and Chief Operating Officer for Meta Financial Group and MetaBank Brad C. Hanson Executive Vice President for Meta Financial Group and MetaBank and President of Meta Payment Systems Ronald J. Walters, CPA Tim D. Harvey President of MetaBank Brookings Market Tony Trussell President of MetaBank Sioux Empire Market I. Eugene Richardson, Jr. President of MetaBank Central Iowa Market and MetaBank West Central and Member of the MetaBank West Central Board of Directors Charles B. Friederichs Senior Vice President and Chief Information Officer Jon C. Geistfeld Senior Vice President and Chief Lending Officer Senior Vice President, Secretary, Treasurer and Chief Financial Officer for Meta Financial Group and MetaBank and Secretary for MetaBank West Central Sandra K. Hegland Senior Vice President of Human Resources Ellen E. Moore Senior Vice President of Marketing and Sales for Meta Financial Group, MetaBank, and MetaBank West Central Susan C. Jesse Senior Vice President of Compliance and Operations 3 5 INVESTOR INFORMATION Annual Meeting of Shareholders Shareholder Services and Investor Relations The Annual Meeting of Shareholders will convene at 1:00 pm on Monday, Shareholders desiring to change the name, address, or ownership of stock; January 23, 2006. The meeting will be held in the Board Room of MetaBank, to report lost certificates; or to consolidate accounts, should contact the 121 East Fifth Street, Storm Lake, Iowa. Further information with regard corporation’s transfer agent: to this meeting can be found in the proxy statement. General Counsel Mack, Hansen, Gadd, Armstrong & Brown, P.C. 316 East Sixth Street P.O. Box 278 Storm Lake, Iowa 50588 Special Counsel Katten Muchin Rosenman LLP 1025 Thomas Jefferson Street NW East Lobby, Suite 700 Washington, D.C. 20007-5201 Independent Auditors McGladrey & Pullen LLP 400 Locust Street, Suite 640 Des Moines, Iowa 50309-2372 Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Telephone: 800.368.5948 Email: invrelations@rtco.com Website: www.rtco.com Form 10-K Copies of the Company’s Annual Report on Form 10-K for the year ended September 30, 2005 (excluding exhibits thereto) may be obtained without charge by contacting: Investor Relations Meta Financial Group 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 Telephone: 712.732.4117 Email: invrelations@metacash.com Website: www.metacash.com DIVIDEND AND STOCK MARKET INFORMATION Meta Financial Group’s common stock trades on the Nasdaq National National Market Listing. Quarterly dividends for 2004 and 2005 were $0.13. Market under the symbol “CASH.” The Wall Street Journal publishes daily The price range of the common stock, as reported on the Nasdaq System, trading information for the stock under the abbreviation, “MetaFnl,” in the was as follows: FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FISCAL YEAR 2005 FISCAL YEAR 2004 LOW HIGH LOW HIGH $ 22.50 22.25 18.15 16.51 $ 26.00 24.49 24.09 19.89 $ 21.50 21.40 21.97 20.26 $ 23.75 23.90 24.75 24.22 Prices disclose inter-dealer quotations without retail mark-up, mark-down and 311,328 shares subject to outstanding options. The shareholders of or commissions, and do not necessarily represent actual transactions. record number does not reflect approximately 500 persons or entities who Dividend payment decisions are made with consideration of a variety of hold their stock in nominee or “street” name. factors including earnings, financial condition, market considerations, and The following securities firms indicated they were acting as market regulatory restrictions. Restrictions on dividend payments are described in makers for Meta Financial Group stock as of September 30, 2005: Note 13 of the Notes to Consolidated Financial Statements included in this Fig Partners, LLC; Friedman Billings Ramsey & Co.; FTN Midwest Securities.; Annual Report. Howe Barnes Investments, Inc.; Knight Equity Markets, L.P.; Sandler O’Neill As of September 30, 2005, Meta Financial Group had 2,503,655 shares of & Partners; Schwab Capital Markets; and UBS Securities LLC. common stock outstanding, which were held by 249 shareholders of record, 3 6 METABANK METABANK METABANK NORTHWEST IOWA MARKET BROOKINGS MARKET SIOUX EMPIRE MARKET STORM LAKE MAIN OFFICE 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 712.732.4117 800.792.6815 712.732.7105 fax Storm Lake Plaza 1413 North Lake Avenue Storm Lake, Iowa 50588 712.732.6655 712.732.7924 fax Lake View 419 Main Street P.O. Box 649 Lake View, Iowa 51450 712.657.2721 712.657.2896 fax Laurens 104 North Third Street Laurens, Iowa 50554 712.841.2588 712.841.2029 fax Odebolt 219 South Main Street P.O. Box 465 Odebolt, Iowa 51458 712.668.4881 712.668.4882 fax Sac City 518 Audubon Street P.O. Box 6 Sac City, Iowa 50583 712.662.7195 712.662.7196 fax Brookings Sioux Falls SOUTH DAKOTA BROOKINGS MAIN OFFICE 600 Main Avenue P.O. Box 98 Brookings, South Dakota 57006 605.692.2314 800.842.7452 605.692.7059 fax METABANK CENTRAL IOWA MARKET CENTRAL IOWA MAIN OFFICE 4848 86th Street Urbandale, Iowa 50322 515.309.9800 515.309.9801 fax Highland Park 3624 Sixth Avenue Des Moines, Iowa 50313 515.288.4866 515.288.3104 fax Ingersoll 3401 Ingersoll Avenue Des Moines, Iowa 50312 515.274.9674 515.274.9675 fax West Des Moines 3448 Westown Parkway West Des Moines, Iowa 50266 515.226.8474 515.226.8475 fax Laurens Storm Lake Odebolt Sac City Lake View IOWA Menlo Casey Stuart Urbandale Des Moines West Des Moines Meta Payment Systems 4900 South Western Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605-275-9555 605-782-1701 fax metapay.com BILL MARKVE AND ASSOCIATES AND META TRUST Investment and trust services available at bank locations.(1) (1) Non-traditional bank products offered through Ameritas Investment Corporation are not FDIC insured, nor are they guaranteed by MetaBank or any affiliate. May lose value. SIOUX FALLS MAIN OFFICE 2500 South Minnesota Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.977.7500 605.977.7501 fax North Minnesota 1600 North Minnesota Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.338.3470 605.338.3471 fax West 12th Street 2104 West 12th Street P.O. Box 520 Sioux Falls, South Dakota 57101 605.336.8900 605.336.8901 fax Western Avenue 4900 South Western Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.338.0059 605.338.0155 METABANK WEST CENTRAL WEST CENTRAL MAIN OFFICE 615 South Division P.O. Box 606 Stuart, Iowa 50250 515.523.2203 800.523.8003 515.523.2460 fax Casey 101 East Logan P.O. Box 97 Casey, Iowa 50048 641.746.3366 800.746.3367 641.746.2828 fax Menlo 501 Sherman P.O. Box 36 Menlo, Iowa 50164 641.524.4521 metabankonline.com 3 7 Invest in us. Bank with us. See how easy money management can be. MetaBank Building 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 metacash.com 

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