Pathward Financial, Inc. Annual Report 2005

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FY2005 Annual Report · Pathward Financial, Inc.

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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

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.

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

$273

$197

$137

$102

$91

LOW-COST
DEPOSIT BALANCES
As a percentage of
total deposit balances

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

$776

$781

$772

$608

$523

$440

$404

$350

$342

$333

$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

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.

Meta Financial Group, Inc. and Subsidiaries

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

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.

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

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,

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

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

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)

(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

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.

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

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.

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

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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

53,716
4,646

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

8.0%
8.0

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.

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.

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:

Segment assets

YEAR ENDED SEPTEMBER 30, 2003

Revenues from external customers:

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

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

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

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).

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

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.

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

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