Pathward Financial
Annual Report 2006

Plain-text annual report

2006 ANNUAL REPORT for every life change ge Life is a journey, not a destination. It’s pretty simple. Life changes. And when “real life” changes, it’s just smart to make sure your financial life changes with it. That’s why the Meta team developed a unique program with one goal in mind: Make money management easier for customers through every life change. Our unique Life Change ProgramSM coaches customers through the personal and financial challenges of life’s most common changes… so they can spend more time enjoying the journey. 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. (MFG) is a $741 million bank holding company MetaBank is a federally-chartered savings bank with four market for MetaBank, MetaBank West Central, and Meta Trust Company. areas: Northwest Iowa, Brookings, Central Iowa, Sioux Empire; and the Headquartered in Storm Lake, Iowa, the Company converted from mutual nationally recognized Meta Payment Systems division. Meta Payment ownership to stock ownership in 1993. Its primary business is marketing Systems manages four primary business lines that contribute to revenue deposits, loans and other financial services and products to meet the and deposits: prepaid cards, credit cards, Automated Teller Machine needs of its commercial, agricultural, and retail customers. MFG shares (ATM) sponsorship and Automated Clearing House (ACH) origination. are traded on the NASDAQ Global Market.SM MetaBank West Central is a state-chartered commercial bank located in MFG operates under a super-community banking philosophy that allows West Central Iowa. Nineteen bank offices and one additional administrative the Company to grow while maintaining its community bank roots, with office support customers throughout central and northwest Iowa and in local decision making and customer service. Administrative functions, trans- Brookings and Sioux Falls, South Dakota. Meta Trust provides professional parent to the customer, are centralized to enhance the banks’ operational trust services. efficiencies and to improve customer service capabilities. Banks are Members FDIC and Equal Housing Lenders. The Company and its subsidiaries exceed regulatory capital requirements. CONTENTS Company Structure & Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Directors & Senior Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii-iii Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-34 Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 i L TO R: J. TYLER HAAHR, JAMES S. HAAHR Things do not change; we change. —Henry David Thoreau To Our Shareholders Meta Financial Group (MFG) reported net income of $3.92 million or $1.55 per diluted share for the fiscal year ended September 30, 2006. This compares to a net loss of $924,000 or $0.38 per diluted share for fiscal year 2005. Net income for the quarter ended September 30, 2006 was $661,000 or $0.26 per diluted share compared to $546,000 or $0.22 per diluted share during the same period in 2005, representing an 18 percent growth in earnings per share on a matched quarter basis. 2006 earnings were higher $0.77 per diluted share for fiscal public funds deposits, and whole- because of increased card fee year 2006 and $1.08 million or sale borrowings with low-cost income, non-recurring fee income, $0.44 per diluted share for the deposits such as checking and and a lower provision for loan loss, same period in 2005. money market accounts. Total offset in part by higher expenses While earnings greatly checking deposits rose 59.2 such as compensation, card pro- improved from 2005 to 2006, percent during fiscal year 2006, cessing fees, legal and consulting more significant is the continued from $135.9 million at September fees. Negative earnings for 2005 progress toward initiatives that 30, 2005 to $216.3 million at were impacted by a significant we believe will enhance long-term September 30, 2006. A significant loan loss related to loans given performance and earnings: portion of this growth came from to three affiliated companies 1. Growth of Meta Payment deposits generated by MPS. Total involved in automobile sales, Systems, a division of money market accounts increased service and financing, and to the MetaBank; 38.5 percent from $74.6 million owners thereof. 2. Growth of low-cost deposits; to $103.3 million while savings Net income at Meta Payment 3. Analysis of operations for and certificates of deposit declined Systems (MPS), a separate improved efficiencies; 25.5 percent from $330.5 million reportable business unit of the 4. Branch expansion; and to $246.1 million during the same Company, was $4.5 million or 5. Human resource development time period. The Company used $1.78 per diluted share for fiscal and expansion. deposit increases to pay down year 2006. This compares to a Focused efforts by the Meta wholesale borrowing sources. loss of $808,000 or $0.33 per team contributed, in part, to the Total wholesale borrowings diluted share for same period Company’s improved credit quality at September 30, 2006 were in 2005, when MPS was in its ratios. The improvements resulted $124.6 million, down 34.4 percent start-up phase. Net income for in fewer non-performing loans from $190.0 million at September the traditional banking unit was which contributed to a negative 30, 2005. $1.35 million or $0.54 per diluted provision for loan losses in The Company’s steadfast share for fiscal year 2006 and fiscal 2006. efforts to improve its funding mix $958,000 or $0.39 per diluted On the deposit side, the has shifted the percentage of share for the same period in 2005. Company continues to improve low-cost funds from 24.5 percent The remaining business units its funding mix by replacing higher- of total deposits to 56.5 percent netted losses of $1.94 million or costing certificates of deposit, during the past five years. The shift ii directly improves the Company’s net As a principal member of opportunities to maximize branch Meta Financial Group shares interest income and loan-to-deposit MasterCard,® Visa,® Discover® and profitability and contributions. closed at $18.66 on September 30, interest rate spreads. the regional debit networks, MPS In January 2006, the Company 2005 and increased to $24.60 on Meta Financial Group’s net expands the Company’s opportunity was pleased to appoint Jonathan September 30, 2006. On behalf of interest income for fiscal year 2006 and reach in the growing payments M. Gaiser, CFA, as Senior Vice all Meta Financial Group associates, was $19.64 million compared to industry. It serves banks, card President, Secretary, Treasurer, we remain dedicated to increasing $19.24 million for 2005. The 2 percent increase was driven by a higher net interest margin, offset in part by a smaller earning asset base. Net interest margin for fiscal It’s not a coincidence that Meta means change. shareholder value and enhancing your return. It is not a coincidence that Meta means change. Thank you for your interest in our company. Invest in us. year 2006 was 2.84 percent, com- processors, and third-party market- and Chief Financial Officer for MFG Bank with us. Enjoy the journey. pared to 2.56 percent in 2005. ing companies nationwide. The MPS and MetaBank, and Secretary for The Company’s non-interest group launched and now manages MetaBank West Central. He and income rose from $3.73 million in four primary business lines that other senior officers such as fiscal year 2005 to $13.41 million contribute to the Company’s revenue Brian Bond, Ron Butterfield, in 2006, up $9.68 million or 259 and deposits: prepaid cards, credit Ray Frohnapfel, John Hagy, Barb percent. The majority of this growth cards, Automated Teller Machine Koopman and Kathy Thorson, who is related to higher fee income (ATM) sponsorship, and Automated joined the Company or assumed JAMES S. HAAHR Chairman of the Board earned on prepaid debit cards and Clearing House (ACH) origination. new responsibilities during the fiscal other card-related products and As of fiscal year end, MPS year, have joined other talented services offered by MPS. The supported clients by implementing Meta associates to fulfill the increase also includes $2.57 million more than 500 prepaid programs Company’s mission: Make money of non-recurring fee income related and issuing more than 20 million management easy for customers J. TYLER HAAHR President & CEO to a purchased portfolio of prepaid cards. MPS also recently completed through every life change. debit cards. two patent applications for software Also in January 2006, MFG LOW-COST DEPOSIT BALANCES In millions LOW-COST DEPOSIT BALANCES As a percentage of total deposit balances developed to support client pro- welcomed Mr. Frederick V. Moore, grams. Its ATM Services unit now President of Buena Vista University, sponsors more than 25 percent of as an independent director of the the white-label ATMs placed nation- Company, MetaBank and MetaBank wide. MPS joined as a founding West Central. He is very well- member of the National Branded qualified and has been quick to Prepaid Card Association (NBPCA) make contributions for the better- in an effort to assist in the ongoing ment of the Company. formation of the branded prepaid At September 30, 2006, the card industry. MPS President, Brad Company had assets totaling $741.1 Hanson, was invited to serve on million, compared to $775.8 million the NBPCA Board of Directors. at September 30, 2005. The reduc- In addition to MPS’ expansion, tion in assets primarily reflects the the Company opened two new Company’s planned strategy to offices in Sioux Falls, South Dakota reduce the level of lower yielding and one in West Des Moines, Iowa. investment securities and reduce The Company continues to consider higher costing deposits and whole- branching structure and additional sale borrowings. iii $320$87$116$151$211060203040505010015020025030035056%24%26%33%39%0602030405FINANCIAL HIGHLIGHTS (Dollars in Thousands except Per Share Data) AT SEPTEMBER 30 2006 2005 2004 2003 2002 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 741,132 $ 775,839 $ 780,799 $ 772,285 $ 607,648 Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388,762 565,710 45,332 440,190 541,042 42,959 404,051 461,581 47,274 349,692 435,553 43,031 341,937 355,780 44,588 Book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.89 $ 17.16 $ 18.98 $ 17.25 $ 18.06 Total equity to assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12% 5.54% 6.05% 5.57% 7.34% FOR THE FISCAL YEAR Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,636 $ 19,239 $ 17,769 $ 15,728 $ 13,700 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net yield on interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,921 1.55 .52% 9.09% 2.84% (924) $ (0.38) $ -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% TOTAL ASSETS In millions TOTAL LOANS, NET In millions TOTAL DEPOSITS In millions TOTAL NET INCOME In thousands FINANCIAL CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Selected Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Consolidated Statements of Financial Condition at September 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consolidated Statements of Operations for the Years Ended September 30, 2006, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended September 30, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . 14 Consolidated Statements of Cash Flows for the Years Ended September 30, 2006, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1 $741$608$772$781$77606020304050100200300400500600700800$389$342$350$404$4400602030405$3,921$2,157$3,397$3,987$(924)0602030405$566$356$436$462$5410602030405 Meta Financial Group, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL INFORMATION SEPTEMBER 30, 2006 2005 2004 2003 2002 SELECTED FINANCIAL CONDITION DATA (In Thousands) Total assets Loans receivable, net Securities available for sale Goodwill 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 non-interest income Total non-interest expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Earnings (loss) per common share Basic Diluted YEAR ENDED SEPTEMBER 30, SELECTED FINANCIAL RATIOS AND OTHER DATA PERFORMANCE RATIOS Return on average assets Return on average equity Net interest margin Operating expense to average assets QUALITY RATIOS Non-performing assets to total assets at end of year Allowance for loan losses to non-performing loans CAPITAL RATIOS Shareholders’ equity to total assets at end of period Average shareholders’ equity to average assets OTHER DATA Book value per common share outstanding. Dividends declared per share Number of full-service offices $ $ $ $ $ $ $ $ 741,132 388,762 186,176 3,403 565,710 124,576 45,332 40,578 20,942 19,636 (454) 20,090 13,406 27,625 5,871 1,950 3,921 775,839 440,190 230,893 3,403 541,042 190,012 42,959 41,093 21,854 19,239 5,482 13,757 3,731 19,097 (1,609) (685) (924) $ $ 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 $ $ 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 3,397 607,648 341,937 218,247 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 1.58 1.55 $ $ (0.38) (0.38) $ $ 1.61 1.57 $ $ 1.37 1.36 $ $ 0.88 0.87 0.52% 9.09% 2.84% 3.69% 0.56% 146% 6.12% 5.76% -0.12% -2.05% 2.56% 2.43% 0.69% 1057% 5.54% 5.77% 0.51% 8.69% 2.40% 1.91% 0.09% 754% 6.05% 5.91% 0.47% 7.57% 2.31% 1.93% 0.28% 493% 5.57% 6.25% 0.38% 4.95% 2.56% 2.16% 0.58% 220% 7.34% 7.68% $ $ $ $ 17.89 0.52 19 $ $ 17.16 0.52 17 $ $ 18.98 0.52 16 $ $ 17.25 0.52 16 18.06 0.52 15 2 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS one year of start-up and development, the division had reached profitability by the end of GENERAL Meta Financial Group, Inc.® (the “Company”) is a bank holding company whose primary subsidiaries are MetaBank and MetaBank West Central (“MetaBank WC”). The Company was incorporated in 1993 as a unitary non-diversified savings and loan holding company that, on September 20 of that year, acquired all of the capital stock of MetaBank, a fed- fiscal year 2005. By June 2006 the division had recouped all of the Company’s initial investment in the division, and is now a significant contributor to the Company’s financial performance. The division’s efforts have also resulted in the filing of two patent applica- tions to protect the Company’s investment in its intellectual property. See Note 18 in the Notes to Consolidated Financial Statements. In June 2006, the Company recorded eral savings bank, in connection with MetaBank’s conversion from mutual to stock form $2,570,000 in non-recurring pre-tax fee income at MPS related to fees received on a of ownership. On September 30, 1996, the Company became a bank holding company purchased portfolio of prepaid debit cards. in conjunction with the acquisition of MetaBank WC, a state-chartered commercial bank. The Company’s stock trades on the NASDAQ Global Market under the symbol “CASH.” The Company focuses on establishing and maintaining long-term relationships with customers, and is committed to serving the financial service needs of the communities FINANCIAL CONDITION in its market area. The Company’s primary market area includes the following counties: Adair, Buena Vista, Dallas, Guthrie, Pocahontas, Polk, and Sac located in central and The following discussion of the Company’s consolidated financial condition should be read in conjunction with the Selected Consolidated Financial Information and northwestern Iowa, and Brookings, Lincoln, and Minnehaha located in east central South Dakota. The Company attracts retail deposits from the general public and uses those deposits, together with other borrowed funds, to originate and purchase residential and commercial mortgage loans, to originate consumer, agricultural and other commercial loans. Meta Payment Systems,® a division of MetaBank, (“MPS”) is an industry leader in the issuance of prepaid debit cards and the provider of a wide range of debit card and money transfer related products and services. Consolidated Financial Statements and the related notes included elsewhere herein. The Company’s total assets at September 30, 2006 were $741.1 million, a decrease of $34.7 million, or 4.5 percent, from $775.8 million at September 30, 2005. The decrease in assets was due primarily to a planned decrease in securities available for sale and a decrease in the Company’s purchased loan participation portfolio, offset in part primarily by an increase in total cash and cash equivalents. Total cash and cash equivalents increased by $95.0 million from $14.4 million at September 30, 2005 to $109.4 million at September 30, 2006. The Company’s port- OVERVIEW OF CORPORATE DEVELOPMENTS folio of securities purchased under agreements to resell and available for sale In November 2005 the Company opened a new full-service branch in the Sioux Falls decreased $76.3 million, or 28.4 percent, to $192.1 million at September 30, 2006 market. The branch includes administrative office space which houses much of the from $268.4 million at September 30, 2005. The Company’s portfolio of securities Information Systems department and MPS division. In September 2006, the Company available for sale consists primarily of mortgage-backed securities, most with balloon opened a new full-service branch in the Des Moines market. The Company now operates maturities, which have relatively short expected average lives and limited maturity 19 branches in Brookings (1) and Sioux Falls (4), South Dakota, and Des Moines (5), extension risk. During fiscal year 2006, the company purchased only one security for Northwest (6), and West-Central (3), Iowa. In August 2006, the Company also leased its available for sale portfolio totaling $108,000, and did not sell any securities. office space at another location in Sioux Falls to house various administrative support Principal cash flows from the available for sale portfolio decreased to $41.7 million in functions and MPS offices. As a result of these branch and office openings, the 2006 from $78.0 million in 2005. See Note 4 in the Notes to Consolidated Financial Company has incurred, and will continue to incur, increases in both compensation and Statements. occupancy and equipment expense. Management believes these increases will be offset The Company’s portfolio of net loans receivable decreased by $51.4 million, or by additional net interest income and fee income as the new branches mature, and 11.7%, to $388.8 million at September 30, 2006 from $440.2 million at September 30, as MPS grows. During the first half of fiscal year 2006, the company completed its foreclosure, repossession, and liquidation of the majority of remaining assets of three companies involved in automobile sales, service, and financing. Two of these companies had filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in June 2005. MetaBank had been the lead lender and servicer of approximately $32.0 million in loans to these three companies and their principal owners. As of September 30, 2006, the Company had charged off all remaining loan balances related to this relationship, and had only one related property left in its possession, with a carrying value of $35,000. At this time, the Company continues to expect that total cash expenditures on legal and collection efforts related to these loans will range between $750,000 and $1,100,000, of which approxi- mately $700,000 has already been incurred. The participation of the aforementioned auto-dealership related loans remains the subject of dispute between several of the participants and MetaBank. In March 2006, the Company reached a settlement agreement with one of the participant banks. In June 2006, MetaBank was named in lawsuits filed by three of the participant banks related to these loans. The Company is vigorously defending these claims. See “Legal Proceedings” under Note 16 in the Notes to Consolidated Financial Statements. MPS exhibited rapid growth during fiscal year 2006. The division was created in 2005. The decrease was mainly the result of pay offs and pay downs in the Company’s purchased loan participation portfolio, which is concentrated in commercial real estate and commercial operating credits. The Company experienced slight growth in its agricul- tural real estate and agricultural operating portfolios. See Note 5 in the Notes to Consolidated Financial Statements. The Company owns stock in the Federal Home Loan Bank (“FHLB”) of Des Moines as well as in the Federal Reserve Bank due to its membership and participation in these banking systems. The Company’s investment in such stock decreased $2.5 million, or 30.1%, to $5.8 million at September 30, 2006 from $8.3 million at September 30, 2005. The decrease was due to a decrease in the level of borrowings from the FHLB, which require a calculated level of stock investment based on a formula determined by the FHLB. Deposit balances increased by $24.7 million, or 4.6%, to $565.7 million at September 30, 2006 from $541.0 million at September 30, 2005. The increase in deposits is primarily due to growth in low- and no-cost demand deposits and money market accounts, offset by decreases in higher costing certificates and public funds deposits. Most of the growth in demand deposits originated from MPS. Total checking deposits increased by $80.4 million, or 59.2%, to $216.3 million at September 30, 2006 from $135.9 million at September 30, 2005. Total savings and certificates of deposit declined $84.4 million, or 25.5%, to $246.1 million at September 30, 2006 May 2004 to take advantage of opportunities in the growing area of prepaid debit cards, ATM sponsorship, and other money transfer systems and services. After approximately from $330.5 million at September 30, 2005. The decrease in savings and certificates resulted primarily from the runoff of higher costing public funds deposits. Money market 3 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS accounts also exhibited growth during fiscal year 2006, increasing $28.7 million, or 2005. The increase in net interest income reflects a higher net interest margin, offset in 38.5%, to $103.3 million at September 30, 2006 from $74.6 million at September 30, part by a smaller average earning asset base. Net interest margin increased 28 basis 2005. Money market deposits grew from increased market penetration by the points to 2.84 percent in fiscal year 2006 from 2.56 percent in fiscal year 2005. The Company’s retail banking operations and as customers’ opportunity cost of holding improvement resulted primarily from the shift in the Company’s funding mix attributable balances in savings and checking accounts rose with the level of short term interest to growth in non-interest-bearing and money market deposits and decreases in higher rates during the year. See Note 8 in the Notes to Consolidated Financial Statements. costing certificates, public funds deposits, and wholesale borrowings. The Company’s wholesale borrowings portfolio decreased $65.4 million, or 34.4%, The Company’s average earning assets decreased $58.6 million, or 7.8 percent, to to $124.6 million at September 30, 2006 from $190.0 million at September 30, 2005. $692.0 million during fiscal year 2006 from $750.6 million during fiscal year 2005. The The decrease was primarily the result of decreased borrowings from the FHLB of Des decrease is primarily the result of a smaller portfolio of securities available for sale and a Moines in conjunction with management’s planned strategy of reducing the size of the smaller average loan portfolio. The Company’s yield on earning assets rose 38 basis balance sheet, and the Company’s reliance on these higher costing funding sources. points to 5.86 percent during fiscal year 2006 from 5.48 percent during fiscal year See Notes 9, 10, and 11 in the Notes to Consolidated Financial Statements. 2005. The increase is the result primarily of increasing yields on the Company’s Shareholders’ equity increased $2.3 million, or 5.5%, to $45.3 million at September adjustable rate loan portfolio due to an increasing interest rate environment during 2006. 30, 2006 from $43.0 million at September 30, 2005. The increase in shareholders’ The Company’s average total deposits and interest-bearing liabilities decreased equity was primarily due to net income, partially offset by cash dividends and an $38.2 million, or 5.2 percent, to $699.8 million during fiscal year 2006 from $738.0 increase in other accumulated comprehensive loss associated with the Company’s million during fiscal year 2005. The decrease resulted mainly from a decrease in the securities available for sale portfolio. See Note 15 in the Notes to Consolidated Financial Company’s portfolio of advances from the FHLB and other wholesale borrowings. Statements. RESULTS OF OPERATIONS Decreases in public funds deposits were more than offset by growth in non-interest bearing checking accounts. The Company’s cost of total deposits and interest-bearing liabilities rose 3 basis points during fiscal year 2006 to 2.99 percent during fiscal year The following discussion of the Company’s results of operations should be read in con- 2006 from 2.96 percent during fiscal year 2005. Despite an increasing interest rate junction with the Selected Consolidated Financial Information and Consolidated Financial environment in 2006, which drove the costs of certificates and money market deposits Statements and the related notes included elsewhere herein. higher, the Company was able to limit the increase in its overall cost of funds by shifting The Company’s results of operations are dependent on net interest income, non- its portfolio mix away from higher costing certificates, public funds deposits, and whole- interest income, non-interest expense, and income tax expense. Net interest income is sale borrowings, into lower costing demand deposits. the difference, or spread, between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. The interest rate spread is affected by PROVISION FOR LOAN LOSSES regulatory, economic, and competitive factors that influence interest rates, loan demand, In fiscal year 2006, the Company recorded a negative provision for loan losses of and deposit flows. The Company, like other financial institutions, is subject to interest rate $454,500, compared to a positive provision for loan losses of $5,482,000 for fiscal year risk to the extent that its interest earning assets mature or reprice at different times, or 2005. The negative provision in 2006 relates in part to the Company’s settlement agree- on a different basis, than its interest bearing liabilities. ment with one of several participants in the aforementioned auto-dealership related lend- The Company’s non-interest income is derived primarily from card fees attributable ing relationship. Additionally, shrinkage in the Company’s loan portfolio during the year to the activities of MPS and fees charged on loans and transaction accounts. This reduced the level of required loan loss allowances on the portfolio. The large provision for income is offset, in part, by expenses, such as card processing expenses, attributable to MPS, as well as additional compensation and occupancy expenses associated with addi- tional personnel and office locations. To a lesser extent, non-interest income is derived from gains or losses on the sale of loans and securities available for sale as well as the loan losses in fiscal year 2005 stemmed primarily from provisions related to losses in the aforementioned auto-dealership related loans. The relatively large provision in fiscal year 2005 and the negative provision in fiscal year 2006 is the primary reason that net interest income after provision for loan losses increased by $6.3 million, from $13.8 Company’s holdings of bank owned life insurance. Additionally, non-interest income has been derived from the activities of Meta Trust Company, a wholly-owned subsidiary of Meta Financial Group, which provides a variety of professional trust services. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005 GENERAL The Company recorded net income of $3,921,000 for the year ended September 30, 2006, compared to a net loss of $924,000 for the year ended September 30, 2005. million in fiscal 2005 to $20.1 million in fiscal year 2006. Management closely monitors economic developments both regionally and nation- wide, and considers these factors when assessing the adequacy of its allowance for loan losses. Although current economic conditions are relatively strong, management is aware that many economists have forecasted a slowdown in economic growth during calendar year 2007. Additionally, management has monitored the disinflationary trend in residen- tial and commercial real estate prices in recent quarters. Economic conditions in the agricultural sector of the Company’s market area are relatively strong. Recent rises in agricultural commodity prices will serve to offset more modest yields this year. The agri- Earnings in fiscal year 2006 were primarily impacted by card fees, non-recurring fee income, and a negative provision for loan loss, partially offset by higher compensation, occupancy, legal and consulting, and card processing expenses. Earnings in fiscal year 2005 were impacted by a large provision for loan loss. cultural economy is accustomed to commodity price fluctuations and is generally able to handle such fluctuations without significant problems. The recent decrease in energy prices should also help to improve cash flows of consumers and businesses alike if the decrease persists during 2007. NET INTEREST INCOME Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, Net interest income for the year ended September 30, 2006 increased by $397,000, or the current level of the allowance for loan losses reflects an adequate allowance against 2.1 percent, to $19,636,000 from $19,240,000 for the year ended September 30, probable losses from the loan portfolio. Although the Company maintains its allowance 4 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, (Dollars in Thousands) INTEREST-EARNING ASSETS Interest-earning assets: Loans receivable(1) Mortgage-backed securities Other investments Total interest-earning assets Non-interest-earning assets Total assets Non-interest bearing deposits INTEREST-BEARING LIABILITIES Interest-bearing liabilities: Interest-bearing checking and money markets Savings Time deposits FHLB advances Other borrowings Total interest-bearing liabilities Total deposits and interest-bearing liabilities Other non-interest bearing liabilities Total liabilities Shareholders’ equity Total Liabilities and shareholders’ equity Net interest income and net interest rate spread including non-interest bearing deposits Net interest margin $ $ $ $ $ 2006 Interest Earned /Paid Average Outstanding Balance Yield /Rate Average Outstanding Balance 2005 Interest Earned /Paid Yield /Rate Average Outstanding Balance 2004 Interest Earned /Paid $ $ 29,743 6,776 4,059 40,578 415,248 179,500 97,223 691,971 57,439 749,410 7.16% $ 3.77% 4.17% 5.86% $ 436,146 265,996 48,449 750,591 35,607 786,198 $ $ 29,831 9,644 1,618 41,093 6.84% $ 3.63% 3.34% 5.48% $ 374,450 317,489 49,248 741,187 34,477 775,664 $ $ 24,260 10,871 1,049 36,180 Yield /Rate 6.48% 3.42% 2.13% 4.88% 150,509 $ - 0.00% $ 34,794 $ - 0.00% $ 19,419 $ - 0.00% $ $ 3,293 1,402 8,810 6,066 1,371 20,942 20,942 114,201 48,839 232,822 126,573 26,846 549,281 699,790 6,484 706,274 43,136 749,410 2.88% $ 112,495 57,566 2.87% 285,115 3.78% 209,618 4.79% 38,377 5.11% 703,171 3.81% 737,965 2.99% 2,882 740,847 45,351 786,198 $ $ $ 1,856 1,321 8,903 8,295 1,478 21,853 21,853 1.65% $ 2.29% 3.12% 3.96% 3.85% 3.11% 2.96% $ 19,636 2.87% 2.84% $ 19,240 2.52% 2.56% 112,817 36,236 304,322 203,135 49,287 705,797 725,216 4,582 729,798 45,866 $ $ $ $ 1,289 475 7,875 7,549 1,223 18,411 18,411 775,664 17,769 1.14% 1.31% 2.59% 3.72% 2.48% 2.61% 2.54% 2.34% 2.40% (1) Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses. for loan losses at a level that it considers to be adequate, investors and others are fiscal year 2005 to $13,221,000 in fiscal year 2006. The increase stems primarily from 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 peri- ods. In addition, the Company’s determination of the allowance for loan losses is subject staff acquisition costs related to growth at MPS and the staffing of two de novo branch facilities in the Sioux Falls market. The new branch in Des Moines did not significantly impact non-interest expense for the year, due to its opening late in the fiscal year. to review by its regulatory agencies, which can require the establishment of additional general or specific allowances. NON-INTEREST INCOME Costs associated with the processing of card-related products at MPS also increased during fiscal year 2006. Card processing expense rose $2,648,000 from $338,000 in fiscal year 2005 to $2,986,000 in fiscal year 2006 as a result of the signif- icant growth in the division’s product lines. These expenses stem primarily from fees Non-interest income increased by $9,675,000, or 259.3 percent, to $13,406,000 for charged by third party card and network transaction processors as well as costs associ- the fiscal year 2006 from $3,731,000 from fiscal year 2005. The majority of this growth ated with issuing MetaBank branded prepaid debit cards. Management expects that is related to higher fee income earned on prepaid debit cards and other products and these costs will continue to rise as MPS issues more cards; however it is anticipated that services offered by MPS. The increase also includes $2,570,000 of non-recurring fee overall costs will rise less than revenues associated with these cards. income related to a purchased portfolio of prepaid debit cards. NON-INTEREST EXPENSE Legal and consulting expense increased $2,230,000 in fiscal year 2006, from $796,000 in fiscal year 2005 to $3,026,000 in fiscal year 2006. Several factors con- tributed to this increase. The Company incurred expenses related to the aforementioned Non-interest expense increased by $8,528,000, or 44.6%, to $27,625,000 for fiscal auto dealership-related loans during the course of foreclosing on and liquidating the year 2006 from $19,097,000 for fiscal year 2005. Several factors contributed to this remaining assets of the borrowers. Additionally, as previously mentioned, the Company increase. Compensation expense rose $1,822,000 during the year, from $11,399,000 in has been named in several lawsuits by banks that participated with MetaBank in these 5 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS RATE/VOLUME ANALYSIS 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 Other investments Total interest-earning assets INTEREST-BEARING LIABILITIES Interest-bearing checking and money markets Savings Time deposits FHLB advances Other borrowings Total interest-bearing liabilities Net effect on net interest income 2006 VS. 2005 2005 VS. 2004 Increase (Decrease) Due to Volume Increase (Decrease) Due to Rate Total Increase (Decrease) Increase (Decrease) Due to Volume Increase (Decrease) Due to Rate Total Increase (Decrease) $ $ $ $ $ (1,463) (3,251) 1,955 (2,759) 29 (219) (1,793) (3,739) (514) (6,236) 3,477 $ $ $ $ $ 1,375 383 486 2,244 1,408 300 1,700 1,510 407 5,325 (3,081) $ $ $ $ $ (88) (2,868) 2,441 (515) 1,437 81 (93) (2,229) (107) (911) 396 $ $ $ $ $ 4,220 (1,867) (27) 2,326 (5) 489 (600) 257 (420) (279) 2,605 $ $ $ $ $ 1,351 640 596 2,587 572 357 1,628 489 675 3,721 (1,134) $ $ $ $ $ 5,571 (1,227) 569 4,913 567 846 1,028 746 255 3,442 1,471 lending relationships. The Company has also incurred expenses related to its retention of increase in the average balance of interest-earning assets, and an increase in net an outside consulting firm to complete implementation work related to section 404 of the interest margin. Net interest margin increased to 2.56 percent for the period ended Sarbanes-Oxley Act. At this time, the Company does not anticipate that expenses associ- September 30, 2005 from 2.40 percent for the same period in 2004. The increase in ated with this implementation work will continue at present levels over the long term. net interest margin was due primarily to a change in the composition of the balance Finally, the Company has also chosen to outsource a significant portion of its internal sheet during the year which resulted in significant growth in loans receivable and a sig- audit work to an outside consulting firm. nificant reduction in securities available for sale. INCOME TAX EXPENSE Income tax expense for fiscal year 2006 was $1,950,000. In fiscal year 2005, the Company recorded an income tax benefit of $685,000 due to the net loss recorded that year. The increase in income taxes is primarily the result of the positive change in operat- ing results between the comparable periods. Average yields on earning assets rose 60 basis points to 5.48 percent in fiscal year 2005 from 4.88 percent in fiscal year 2004. The increase in yields is primarily the result of increasing yields on the Company’s adjustable rate loan portfolio and the origination of new loans in a higher interest rate environment than the previous year. The Company’s cost on total deposits and interest-bearing liabilities rose 42 basis points to 2.96 percent during fiscal year 2005 from 2.54 percent during fiscal year 2004. The increase in cost reflects primarily the general increase in market rates COMPARISON OF OPERATING RESULTS FOR THE YEARS on deposits. ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004 GENERAL PROVISION FOR LOAN LOSSES The Company recorded a net loss of $924,000 for the year ended September 30, 2005, compared to net income of $3,987,000 for the year ended September 30, 2004. The decrease in net income primarily reflects a substantial increase in the provision for loan losses. In addition, there was an increase in non-interest expense. These items were partially offset by an increase in net interest income and a small increase in non- interest income. NET INTEREST INCOME Net interest income for the year ended September 30, 2005 increased by $1,471,000, or 8.3 percent, to $19,240,000 compared to $17,769,000 for the period ended September 30, 2004. The increase in net interest income reflects a $9,404,000 The provision for loan losses for the year ended September 30, 2005 was $5,482,000 compared to $489,000 for the same period in 2004. The primary reason for the signifi- cant increase in the provision for loan losses was the losses on the aforementioned auto-dealership related loans. 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. 6 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS NON-INTEREST INCOME ASSET/LIABILITY MANAGEMENT AND MARKET RISK Non-interest income increased by $135,000, or 3.8%, to $3,731,000 for the year QUALITATIVE ASPECTS OF MARKET RISK ended September 30, 2005 from $3,596,000 for the same period in 2004. The increase was primarily due to an increase in card fee income of $1,240,000 generated by MPS, offset by a non-recurring gain of $1,113,000 on the sale of a branch office during 2004. As stated above, the Company derives its income primarily from the excess of interest collected over interest paid. The rates of interest the Company earns on assets and 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 NON-INTEREST EXPENSE most financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. The risk associated with changes in interest rates Non-interest expense increased by $4,266,000, or 28.8%, to $19,097,000 for the year and the Company’s ability to adapt to these changes is known as interest rate risk and is ended September 30, 2005 from $14,831,000 for the same period in 2004. The the Company’s only significant “market” risk. increase in non-interest expense primarily reflects the costs associated with the start-up of operations for MPS, costs related to the process of changing corporate names, costs associated with the liquidation of repossessed assets and foreclosed real estate, a full QUANTITATIVE ASPECTS OF MARKET RISK The Company monitors and measures its exposure to changes in interest rates in order year of operations of the second Sioux Falls office (which opened late in fiscal 2004), the to comply with applicable government regulations and risk policies established by the opening of a third office and preparation for opening a fourth office in Sioux Falls, South Board of Directors, and in order to preserve shareholder value. In monitoring interest rate Dakota, and additional staffing in the lending departments. risk, the Company analyzes assets and liabilities based on characteristics including size, INCOME TAX EXPENSE coupon rate, repricing frequency, maturity date, and likelihood of prepayment. If the Company’s assets mature or reprice more rapidly or to a greater extent than Due to the net loss for the year ended September 30, 2005, the Company recorded a its liabilities, then net portfolio value and net interest income would tend to increase dur- benefit of $685,000, compared to an expense of $2,059,000 for the year ended ing periods of rising rates and decrease during periods of falling interest rates. September 30, 2004. The change in income taxes is reflective of the change in operat- Conversely, if the Company’s assets mature or reprice more slowly or to a lesser extent ing result between the comparable periods. CRITICAL ACCOUNTING POLICY than its liabilities, then net portfolio value and net interest income would tend to decrease during periods of rising interest rates and increase during periods of falling interest rates. The Company currently focuses lending efforts toward originating and purchasing com- The Company’s financial statements are prepared in accordance with accounting princi- petitively priced adjustable-rate and fixed-rate loan products with short to intermediate terms ples generally accepted in the United States of America. The financial information con- to maturity, generally 5 years or less. This theoretically allows the Company to maintain a tained within these statements is, to a significant extent, financial information that is portfolio of loans that will have relatively little sensitivity to changes in the level of interest based on approximate measures of the financial effects of transactions and events that rates, while providing a reasonable spread to the cost of liabilities used to fund the loans. have already occurred. Based on its consideration of accounting policies that involve the The Company’s primary objective for its investment portfolio is to provide a source of most complex and subjective decisions and assessments, management has identified its liquidity for the Company. In addition, the investment portfolio may be used in the man- most critical accounting policies to be those related to the allowance for loan losses and agement of the Company’s interest rate risk profile. The investment policy generally calls asset impairment judgments including the recoverability of goodwill. for funds to be invested among various categories of security types and maturities based The Company’s estimated allowance for loan losses incorporates a variety of risk upon the Company’s need for liquidity, desire to achieve a proper balance between mini- considerations, both quantitative and qualitative, which are reviewed as of each reporting mizing risk while maximizing yield, the need to provide collateral for borrowings, and to date. Quantitative factors include the Company’s historical loss experience, delinquency fulfill the Company’s asset/liability management goals. and charge-off trends, collateral values, changes in nonperforming loans, and other fac- The Company’s cost of funds responds to changes in interest rates due to the rela- tors. Quantitative factors also incorporate known information about individual loans, tively short-term nature of its deposit portfolio, and due to the relatively short-term nature including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions of its borrowed funds. The Company’s growing portfolio of low- or no-cost deposits pro- vides a stable and profitable funding vehicle, but also subjects the Company to greater throughout the Midwest and, in particular, the state of certain industries. Size and com- plexity of individual credits in relation to loan structure, existing loan policies, and pace of portfolio growth are other qualitative factors that are considered in the estimate. risk in a falling interest rate environment than it would otherwise have without this port- folio. This risk is due to the fact that, while asset yields may decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors changes. This discussion and analysis should be read in conjunction these deposits; thereby compressing the Company’s net interest margin. As a result of the Company’s new interest rate risk exposure in this regard, the Company has elected not to enter in to any new longer term wholesale borrowings, and generally has not with the Company’s financial statements and the accompanying notes presented else- emphasized longer term time deposit products. where herein, as well as the portion of this Management’s Discussion and Analysis sec- The Board of Directors and relevant government regulations establish limits on the tion entitled “Asset Quality.” Although management believes the levels of the allowance level of acceptable interest rate risk at the Company, to which management adheres. as of both September 30, 2006 and September 30, 2005 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions or There can be no assurance, however, that, in the event of an adverse change in interest rates, the Company’s efforts to limit interest rate risk will be successful. other factors, could result in increasing losses. See Notes 1 and 5 in the Notes to Consolidated Financial Statements. NET PORTFOLIO VALUE Goodwill represents the excess of acquisition costs over the fair value of the net The Company uses a net portfolio value (“NPV”) approach to the quantification of interest assets acquired in a purchase acquisition. Goodwill is tested annually for impairment. rate risk. This approach calculates the difference between the present value of expected 7 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS cash flows from assets and the present value of expected cash flows from liabilities, as Statements. At September 30, 2006, the Company had an allowance for loan losses in well as cash flows from any off balance-sheet contracts. Management of the Company’s the amount of $5.97 million as compared to $7.22 million at September 30, 2005. assets and liabilities is performed within the context of the marketplace, but also within Management’s periodic review of the adequacy of the allowance for loan losses is based limits established by the Board of Directors on the amount of change in NPV that is on various subjective and objective factors including the Company’s past loss experience, acceptable given certain interest rate changes. known and inherent risks in the portfolio, adverse situations that may affect the bor- Presented below, as of September 30, 2006 and 2005, is an analysis of the rower’s ability to repay, the estimated value of any underlying collateral, and current eco- Company’s interest rate risk as measured by changes in NPV for an instantaneous and nomic conditions. While management may allocate portions of the allowance for sustained parallel shift in the yield curve, in 100 basis point increments, up and down specifically identified problem loan situations, the majority of the allowance is based on 200 basis points. As illustrated in the table below, the Company’s NPV at September 30, judgmental factors related to the overall loan portfolio and is available for any loan 2006 was relatively balanced. Growth in the Company’s portfolio of non-interest bearing charge-offs that may occur. In addition, the Company’s banks are subject to intensive deposits during fiscal year 2006 has contributed to a balance sheet that is more asset review by banking regulatory bodies, which have the authority to require management to sensitive, i.e. exhibits more favorable changes in a rising rate environment, as of make changes to the allowance for loan losses. September 30, 2006, than was the case at September 30, 2005. In determining the allowance for loan losses, the Company specifically identifies Certain shortcomings are inherent in the method of analysis presented in the loans that it considers to have potential collectibility problems. Based on criteria table. For example, although certain assets and liabilities may have similar maturities or established by Statement of Financial Accounting Standards (SFAS) No. 114, some of periods to repricing, they may react in different degrees to changes in market interest these loans are considered to be “impaired” while others are not considered to be rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in impaired, but possess weaknesses that the Company believes merit additional analysis advance of changes in market interest rates, while interest rates on other types may in establishing the allowance for loan losses. All other loans are evaluated by applying lag behind changes in market rates. Additionally, certain assets such as adjustable rate estimated loss ratios to various pools of loans. The Company then analyzes other mortgage loans have features that restrict changes in interest rates on a short term factors (such as economic conditions) in determining the aggregate amount of the basis and over the life of the asset. Furthermore, although management has estimated allowance needed. changes in the levels of prepayments and early withdrawal in these rate environments, At September 30, 2006, $839,000 of the allowance for loan losses was allocated to such levels would likely deviate from those assumed in calculating the table. Finally, the impaired loans, representing 20.5 percent of the related loan balances. See Note 5 in ability of some borrowers to service their debt may decrease in the event of an interest the Notes to Consolidated Financial Statements. $2.03 million of the allowance was allo- rate increase. cated to other identified problem loan situations, representing 8.2 percent of the related In addition to the NPV approach, the Company also reviews gap reports, which loan balances, and $3.10 million, representing 0.85 percent of the related loan bal- measure the differences in assets and liabilities repricing in given time periods, and net ances, was allocated to the remaining overall loan portfolio based on historical loss expe- income simulations to assess its interest rate risk profile. Management reviews its inter- rience and general economic conditions. At September 30, 2005, $251,000 of the est rate risk profile on a quarterly basis. ASSET QUALITY allowance for loan losses was allocated to impaired loans, representing 37.1 percent of the related loan balances. $2.45 million was allocated to other identified problem loan situations, and $4.52 million was allocated against losses from the overall loan portfolio It is management’s belief, based on information available at fiscal year end, that the based on historical loss experience and general economic conditions. Company’s current asset quality is satisfactory. At September 30, 2006, non performing assets, consisting of non-accruing loans, accruing loans delinquent 90 days or more, restructured loans, foreclosed real estate, and repossessed consumer property, totaled $4.15 million, or 0.56% of total assets, compared to $5.39 million, or 0.69% of total assets, at September 30, 2005. Non-accruing loans at September 30, 2006 include, among others, a commercial loan in the amount of $3.64 million secured by commercial paving equipment and related property. Foreclosed real estate and repossessed assets at September 30, 2006 totaled $49,500 related to commercial and residential real estate. The Company maintains an allowance for loan losses because of the potential that some loans may not be repaid in full. See Note 1 in the Notes to Consolidated Financial LIQUIDITY AND CAPITAL RESOURCES The Company’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and mortgage backed securities, and maturing investment securities. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions, and competition. The Company relies on advertising, quality customer service, convenient locations, and competitive pricing to attract and retain its deposits and only solicits these deposits from its primary market area. Based on its experience, the Company believes that its consumer checking, savings, and money market accounts are relatively stable sources of Change in Interest Rate (Basis Points) Dollars In Thousands Board Limit % Change $ Change At September 30, 2006 % Change $ Change At September 30, 2005 % Change +200 bp +100 bp 0 - 100 bp - 200 bp (40)% (25) - (25) (40) $ 548 562 - (907) (4,139) 8 1% 1 - (1) (6) $ (1,904) (411) - (2,773) (9,183) (3)% (1) - (5) (16) Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS deposits. The Company’s ability to attract and retain time deposits has been, and will During July 2001, the Company’s unconsolidated trust subsidiary, First Midwest continue to be, affected by market conditions. However, the Company does not foresee Financial Capital Trust I, sold $10 million in floating rate cumulative preferred securities. any significant funding issues resulting from the sensitivity of time deposits to such mar- Proceeds from the sale were used to purchase subordinated debentures of Meta ket factors. Financial Group, which mature in the year 2031, and are redeemable at any time after The Company is aware that, due to higher levels of concentration risk, the low- and five years. The Company used the proceeds for general corporate purposes. See Note 11 no-cost checking deposits generated through MPS may carry a greater degree of liquid- in the Notes to Consolidated Financial Statements. ity risk than traditional consumer checking deposits. As a result, the Company closely The Company and its banking subsidiaries, MetaBank and MetaBank WC, meet reg- monitors balances in these accounts, and maintains a portfolio of highly liquid assets to ulatory requirements for classification as well capitalized institutions. See Note 15 in the fund potential deposit outflows. To date, the Company has not experienced any inordi- Notes to Consolidated Financial Statements. The Company does not anticipate any sig- nate or unusual outflows related to MPS, though no assurance can be given that this will nificant changes to its capital structure. continue to be the case. On August 23, 2004, the Company announced that the Board of Directors had MetaBank and MetaBank WC are required by regulation to maintain sufficient liquid- authorized the Company’s ESOP to purchase up to 40,000 shares of the Company’s ity to assure their safe and sound operation. In the opinion of management, both stock through open market and privately negotiated transactions. The ESOP stock pur- MetaBank and MetaBank WC are in compliance with this requirement. chase was completed on April 18, 2005 at a total cost of $897,000. At September 30, Liquidity management is both a daily and long term function of the Company’s man- 2006, the ESOP held 22,312 unallocated shares, which will be used to fund future con- agement strategy. The Company adjusts its investments in liquid assets based upon tributions to qualified employees. management’s assessment of (i) expected loan demand, (ii) the projected availability of On April 26, 2005, the Company announced that the Board of Directors had author- purchased loan products, (iii) expected deposit flows, (iv) yields available on interest ized the repurchase, at management’s discretion, of up to 100,000 shares of the bearing deposits, and (v) the objectives of its asset/liability management program. Excess Company’s stock through open market and privately negotiated transactions. This repur- liquidity is generally invested in interest earning overnight deposits and other short term chase authorization expired on April 30, 2006, with no shares having been repurchased government agency obligations. If the Company requires funds beyond its ability to gen- under this authorization. Given the impact on shareholders’ equity of the aforementioned erate them internally, it has additional borrowing capacity with the FHLB and other provision for loan loss incurred during fiscal year 2005, management determined that it wholesale funding sources. The Company is not aware of any significant trends in the was not in the best interests of shareholders to proceed with share repurchases during Company’s liquidity or its ability to borrow additional funds if needed. the authorized period. The primary investing activities of the Company are the origination and purchase of The payment of dividends and repurchase of shares has the effect of reducing loans and the purchase of securities. During the years ended September 30, 2006, stockholders’ equity. Prior to authorizing such transactions, the Board of Directors con- 2005 and 2004, the Company originated loans totaling $357.2 million, $382.5 million, siders the effect the dividend or repurchase of shares would have on liquidity and regu- and $295.5 million, respectively. Purchases of loans totaled $68.3 million, 39.7 million, latory capital ratios. and $39.5 million during the years ended September 30, 2006, 2005 and 2004, respectively. During the years ended September 30, 2006, 2005 and 2004, the IMPACT OF INFLATION AND CHANGING PRICES Company purchased mortgage-backed securities and other securities available for sale The Consolidated Financial Statements and Notes thereto presented herein have in the amount of $108,000, $17.6 million, and $46.2 million, respectively. (See Note 4 been prepared in accordance with generally accepted accounting principles, which of Notes to Consolidated Financial Statements.) require the measurement of financial position and operating results in terms of his- At September 30, 2006, the Company had unfunded loan commitments of $52.9 million. See Note 16 in the Notes to Consolidated Financial Statements. Certificates of deposit scheduled to mature in one year or less from September 30, 2006 totaled $152.0 million. Based on its historical experience, management believes that a signifi- torical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, virtu- ally all the assets and liabilities of the Company are monetary in nature. As a result, cant portion of such deposits will remain with the Company, however, there can be no assurance that the Company can retain all such deposits. Management believes that loan repayment and other sources of funds will be adequate to meet the Company’s interest rates generally have a more significant impact on a financial institution’s per- formance than do the effects of general levels of inflation. Interest rates do not nec- essarily move in the same direction, or to the same extent, as the prices of goods foreseeable short and long-term liquidity needs. and services. The following table summarizes the Company’s significant contractual obligations at September 30, 2006 (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 $ 216,217 114,744 2,188 9,831 1,008 $ 343,988 $ 151,996 40,444 301 - 354 $ 193,095 $ $ 49,917 37,000 604 - 654 88,175 $ $ 14,285 30,000 486 - - 44,771 $ $ 19 7,300 797 9,831 - 17,947 9 Meta Financial Group, Inc. and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS IMPACT OF NEW ACCOUNTING STANDARDS requires a company that sponsors a postretirement benefit plan to fully recognize, as an In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. asset or liability, the over- or under-funded status of its benefit plan in its balance sheet. 155, “Accounting for Certain Hybrid Financial Instruments,” which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embed- ded derivative that would otherwise require bifurcation in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The statement also sub- The funded status is measured as the difference between the fair value of the plan’s assets and its benefit obligation (projected benefit obligation for pension plans and accu- mulated postretirement benefit obligation for other postretirement benefit plans). Currently, the funded status of such plans are reported in the notes to the financial state- jects beneficial interests in securitized financial assets to the requirements of SFAS No. ments. This provision is effective for public companies for fiscal years ending after 133. For the Company, this statement is effective for all financial instruments acquired, December 15, 2006. In addition, SFAS No. 158 also requires a company to measure its issued, or subject to remeasurement after the beginning of its fiscal year that begins plan assets and benefit obligations as of its year end balance sheet date. Currently, a after September 15, 2006, with earlier adoption permitted. The Company does not company is permitted to choose a measurement date up to three months prior to its year expect that the adoption of this Statement will have a material impact on its financial end to measure the plan assets and obligations. This provision is effective for all compa- position, results of operation and cash flows. nies for fiscal years ending after December 15, 2008. The Company does not expect that In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of the adoption of this Statement will have a material impact on its financial position, results Financial Assets, an amendment of FASB Statement No. 140.” The statement amends of operation and cash flows. SFAS No. 140 by (1) requiring the separate accounting for servicing assets and servicing liabilities, which arise from the sale of financial assets; (2) requiring all separately recog- FORWARD LOOKING STATEMENTS nized serving assets and servicing liabilities to be initially measured at fair value, if practi- The Company, and its wholly-owned subsidiaries, MetaBank, MetaBank WC, and Meta cable; and (3) permitting an entity to choose between an amortization method or a fair Trust, may from time to time make written or oral “forward-looking statements,” including value method for subsequent measurement for each class of separately recognized serv- statements contained in its filings with the Securities and Exchange Commission, in its icing assets and servicing liabilities. This statement is effective for fiscal years beginning reports to shareholders, and in other communications by the Company, which are made after September 15, 2006, with earlier adoption permitted. The Company does not in good faith by the Company pursuant to the “safe harbor” provisions of the Private expect that the adoption of this Statement will have a material impact on its financial Securities Litigation Reform Act of 1995. position, results of operation and cash flows. These forward-looking statements include statements with respect to the Company’s In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting beliefs, expectations, estimates, and intentions that are subject to significant risks and for Uncertainty in Income Taxes.” This interpretation applies to all tax positions accounted uncertainties, and are subject to change based on various factors, some of which are for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the beyond the Company’s control. Such statements address the following subjects: future application of SFAS No. 109 by defining the criteria that an individual tax position must operating results; customer growth and retention; loan and other product demand; net meet in order for the position to be recognized within the financial statements and pro- interest income; earnings growth and expectations; new products and services, such as vides guidance on measurement, de-recognition, classification, interest and penalties, those offered by MPS or MetaBank; credit quality and adequacy of reserves; technology; accounting in interim periods, disclosure and transition for tax positions. This interpreta- and our employees. The following factors, among others, could cause the Company’s tion is effective for fiscal years beginning after December 15, 2006, with earlier adoption financial performance to differ materially from the expectations, estimates, and intentions permitted. The Company is currently evaluating the impact that the adoption of this inter- expressed in such forward-looking statements: the strength of the United States econ- pretation will have on its financial position, results of operation and cash flows. omy in general and the strength of the local economies in which the Company conducts In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transac- tion between market participants in the market in which the reporting entity transacts. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operation and cash flows. In September 2006, the FASB issued Statement No. 158, (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans— operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; inflation, interest rate, mar- ket, and monetary fluctuations; the timely development of and acceptance of new prod- ucts and services offered by the Company as well as risks (including litigation) attendant thereto and the perceived overall value of these products and services by users; the impact of changes in financial services’ laws and regulations; technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing and collecting assets of borrowers in default and managing the risks (including litigation) involved in the foregoing. The foregoing list of factors is not exclusive. Additional discussion of factors affecting the Company’s business and prospects is contained in the Company’s periodic filings with the SEC. The Company does not undertake, and expressly disclaims any intent or obligation, to update any forward-looking statement, whether written or oral, that may be an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 made from time to time by or on behalf of the Company. 10 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 statements of financial condition of Meta Financial Group, Inc. and Subsidiaries as of September 30, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those stan- dards 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 amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meta Financial Group, Inc. and Subsidiaries as of September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2006, in conformity with U.S. generally accepted accounting principles. Des Moines, Iowa November 22, 2006 11 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2006 AND 2005 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 $5,967,774 at September 30, 2006 and $7,222,404 at September 30, 2005 Loans held for sale Federal Home Loan and Federal Reserve Bank stock, at cost Accrued interest receivable Premises and equipment, net Foreclosed real estate and repossessed assets Bank owned life insurance Goodwill Other assets 2006 2005 $ 7,404,812 101,947,810 109,352,622 5,891,025 186,176,130 388,761,911 507,600 5,768,300 4,378,814 17,623,060 49,500 12,952,837 3,403,019 6,267,215 $ 5,390,455 8,979,299 14,369,754 37,513,348 230,892,565 440,190,245 306,000 8,286,800 4,240,694 15,126,069 4,706,414 12,332,337 3,403,019 4,472,017 Total assets $ 741,132,033 $ 775,839,262 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Non-interest-bearing checking Interest-bearing checking Savings deposits Money market deposits Time certificates of deposit Total deposits Advances from Federal Home Loan Bank Securities sold under agreements to repurchase Subordinated debentures Accrued interest payable Accrued expenses and other liabilities Total liabilities COMMITMENTS AND CONTINGENCIES (NOTE 15) SHAREHOLDERS’ EQUITY Preferred stock, 800,000 shares authorized, no shares issued or outstanding Common stock, $.01 par value; 5,200,000 shares authorized, 2,957,999 shares issued, 2,534,367 and 2,503,655 shares outstanding at September 30, 2006 and September 30, 2005, respectively Additional paid-in capital Retained earnings—substantially restricted Accumulated other comprehensive (loss) Unearned Employee Stock Ownership Plan shares Treasury stock, 423,632 and 454,344 common shares, at cost, at September 30, 2006 and September 30, 2005, respectively Total shareholders’ equity Total liabilities and shareholders’ equity See Notes to Consolidated Financial Statements. $ 189,506,062 26,828,157 29,868,960 103,290,548 216,216,848 565,710,575 99,565,000 15,179,334 9,831,256 971,917 4,542,283 695,800,365 $ 102,435,429 33,481,270 62,370,483 74,632,300 268,122,096 541,041,578 159,705,000 20,507,051 9,800,320 941,935 884,688 732,880,572 - - 29,580 20,968,492 37,186,249 (4,547,719) (509,201) (7,795,733) 45,331,668 29,580 20,646,513 34,557,258 (3,180,607) (825,057) (8,268,997) 42,958,690 $ 741,132,033 $ 775,839,262 12 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 Interest and dividend income: Loans receivable, including fees Mortgage backed securities Other investments Interest expense: Deposits FHLB advances and other borrowings Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income: Deposit Fees Loan Fees Gain on sales of loans, net (Loss) on sales of foreclosed real estate, net (Loss) on sales of securities available for sale, net Gain on sale of branch office Card fees Bank owned life insurance income Other income Total non-interest income Non-interest expense: Compensation and benefits Occupancy and equipment expense Marketing Data processing expense Card processing expense Legal and consulting expense Other expense Total non-interest expense Income tax expense (benefit) Net income (loss) Earnings (loss) per common share: Basic Diluted Dividends declared per common share: See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 2006 2005 2004 $ $ 29,742,992 6,776,539 4,058,444 40,577,975 13,505,392 7,436,543 20,941,935 $ 29,831,923 9,644,201 1,617,184 41,093,308 12,080,046 9,773,747 21,853,793 24,259,727 11,698,933 221,596 36,180,256 9,639,441 8,771,744 18,411,185 19,636,040 19,239,515 17,769,071 (454,500) 20,090,540 5,482,000 13,757,515 488,500 17,280,571 1,004,200 457,141 62,908 (1,936) - - 10,499,490 620,500 763,554 13,405,857 13,221,122 3,133,459 735,464 714,684 2,986,034 3,026,054 3,808,808 27,625,625 1,330,750 291,882 47,719 - (19,334) - 1,240,202 484,916 354,472 3,730,607 11,398,887 2,555,574 828,802 660,070 337,549 795,586 2,520,590 19,097,058 1,949,810 3,920,962 (684,685) (924,251) 1,275,452 272,969 56,404 (8,752) - 1,113,230 650 546,030 339,786 3,595,769 9,473,684 1,123,687 437,461 400,542 24,407 128,116 3,242,695 14,830,592 6,045,748 2,058,698 3,987,050 $ $ 1.58 1.55 0.52 $ $ (0.38) (0.38) 0.52 $ $ 1.61 1.57 0.52 Net income (loss) before income tax expense (benefit) 5,870,772 (1,608,936) Net income (loss) Other comprehensive (loss): Net change in net unrealized (loss) on securities available for sale Deferred income tax benefit Total other comprehensive (loss) Total comprehensive income (loss) See Notes to Consolidated Financial Statements. 2006 2005 2004 $ 3,920,962 $ (924,251) $ 3,987,050 (2,186,114) (819,002) (3,090,094) (1,149,825) (1,367,112) (1,940,269) 2,848,264 1,059,840 1,788,424 $ 2,553,850 $ (2,864,520) $ 5,775,474 13 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Balance, September 30, 2003 $ 29,580 $ 20,538,879 $ 34,057,741 $(3,028,762) $ Cash dividends declared on common stock ($.52 per share) Puchase of 39,470 common shares of treasury stock Issuance of 36,546 common shares from treasury stock due to exercise of stock options Purchase of 10,000 common shares for ESOP 13,000 common shares committed to be released under the ESOP Net change in net unrealized losses on securities available for sale, net of income taxes Net income for year ended September 30, 2004 Balance, September 30, 2004 Balance, September 30, 2004 Cash dividends declared on common stock ($.52 per share) Puchase of 1,000 common shares of treasury stock Issuance of 13,630 common shares from treasury stock due to exercise of stock options Purchase of 30,000 common shares for ESOP 14,000 common shares committed to be released under the ESOP Net change in net unrealized losses on securities available for sale, net of income taxes Net (loss) for year ended September 30, 2005 Balance, September 30, 2005 Balance, September 30, 2005 Cash dividends declared on common stock ($.52 per share) Issuance of 18,712 common shares from treasury stock due to exercise of stock options Issuance of 3,667 common shares from treasury stock due to issuance of nonvested shares Stock compensation 14,500 common shares committed to be released under the ESOP Net change in net unrealized losses on securities available for sale, net of income taxes Net income for year ended September 30, 2006 Balance, September 30, 2006 See Notes to Consolidated Financial Statements. $ $ $ $ $ Unearned Employee Stock Ownership Plan Shares (401,676) - - - (212,400) 219,310 Treasury Stock Total Sharehholders’ Equity $ (8,164,963) $ 43,030,799 (1,286,533) (906,650) (906,650) - 514,500 - - 582,557 (212,400) 291,018 - - (394,766) 1,788,424 3,987,050 $ (8,557,113) $ 47,274,265 - - (394,766) - - - (684,133) 253,842 $ (8,557,113) $ 47,274,265 (1,276,749) (25,655) (25,655) - 313,771 - - 230,414 (684,133) 305,068 - - - - - - - (1,286,533) - 68,057 - 71,708 - - - - - - - - - - 1,788,424 - 29,580 $ 20,678,644 $ 36,758,258 $ (1,240,338) - 3,987,050 - - 29,580 $ 20,678,644 $ 36,758,258 $ (1,240,338) - - (1,276,749) - - - - - - - - (83,357) - 51,226 - - - - - - $ $ - - (825,057) (1,940,269) (924,251) $ (8,268,997) $ 42,958,690 - - $ $ (825,057) - - $ (8,268,997) $ 42,958,690 (1,291,971) - 429,150 273,285 - - 315,856 44,114 - - - 481,117 356,697 - - (509,201) (1,367,112) 3,920,962 $ (7,795,733) $ 45,331,668 - - $ - - (1,940,269) - 29,580 $ 20,646,513 $ 34,557,258 $ (3,180,607) - (924,251) - - 29,580 $ 20,646,513 $ 34,557,258 $ (3,180,607) - (1,291,971) - - - - - - (155,865) (44,114) 481,117 40,841 - - - - - - - - - - 29,580 (1,367,112) - $ 20,968,492 $ 37,186,249 $ (4,547,719) - 3,920,962 - - 14 Meta Financial Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income to net cash from operating activities: Effect of contribution to employee stock ownership plan Depreciation, amortization and accretion, net Provision for loan losses Loss on the sale of securities available for sale, net Stock compensation Net change in loans held for sale (Gain) on sale of branch office (Gain) loss on sales of foreclosed real estate, net (Gain) on sales of loans, net Net change in accrued interest receivable Net change in other assets Net change in accrued interest payable Net change in accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale Proceeds from sales of securities available for sale Net change in securities purchased under agreement to resell Proceeds from maturities and principal repayments of securities available for sale Loans purchased Net change in loans receivable Proceeds from sales of foreclosed real estate Cash transferred to buyer on sale of branch Net change in FHLB / FRB stock Purchase of premises and equipment Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net change in checking, savings, and money market deposits Net change in time deposits Net repayments of advances from Federal Home Loan Bank Net change in securities sold under agreements to repurchase Cash dividends paid Purchase of shares by ESOP Proceeds from exercise of stock options Purchase of treasury stock Net cash provided by (used in) financing activities Net change in cash and equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest Income taxes SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed real estate 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 deposits 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. 15 2006 2005 2004 $ 3,920,962 $ (924,251) $ 3,987,050 356,697 3,204,005 (454,500) - 481,117 264,508 - 1,936 (62,908) (138,120) (2,241,216) 29,982 3,657,595 9,020,058 (108,522) - 31,622,323 41,723,244 68,294,224 (17,067,490) 4,656,914 - 2,518,500 (3,772,850) 127,866,343 76,574,245 (51,905,248) (60,140,000) (5,327,717) (1,291,971) - 187,158 - (41,903,533) 305,068 3,276,520 5,482,000 19,334 - 11,719 - - (47,719) (391,479) (1,268,382) 468,509 (1,259,560) 5,671,759 (17,628,374) 25,842,710 (37,513,348) 78,086,047 (39,697,273) (6,708,447) 22,028 - 2,891,700 (4,434,538) 860,505 75,877,809 3,366,561 (66,545,000) (12,042,326) (1,276,749) (684,133) 230,414 (25,655) (1,099,079) 94,982,868 5,433,185 14,369,754 109,352,622 20,911,953 1,689,334 $ $ 8,936,569 14,369,754 21,385,284 605,911 $ $ 291,018 4,365,294 488,500 - - 912,714 (1,113,230) 8,752 (56,404) 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) (122,400) (1,364,922) (27,168,225) 66,137,257 (24,052,970) 2,465,606 (25,152,657) (1,286,533) (212,400) 582,557 (906,650) 17,574,210 (820,246) 9,756,815 8,936,569 18,444,620 2,213,428 49,500 $ 4,728,442 $ 58,349 - - - - - - - - - - - - - - - - - - (730,704) (5,518) (110,818) 6,349,270 9,753,484 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 PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Meta Financial Group, Inc. (the “Company”) a bank holding company located in Storm Lake, Iowa, and its wholly owned subsidiaries which include MetaBank (the “Bank”), a federally chartered savings bank whose primary regulator is the Office of Thrift Supervision, MetaBank West Central (MBWC), a state chartered commercial bank whose primary regulator is the Federal Reserve, (together the “Banks”), First Services Financial Limited and Brookings Service Corporation, which offer noninsured investment products, Meta Trust Company, which offers various trust services. The Company also owns 100% of First Midwest Financial Capital Trust I (the Trust), which was formed in July 2001 for the purpose of issuing trust preferred securities. The Company presents the activity in the Trust under FASB Interpretation 46 (Revised), Consolidation of Variable Interest Entities, which requires the Company to use the equity method of accounting for this investment. All significant inter- company balances and transactions have been eliminated. NATURE OF BUSINESS AND INDUSTRY SEGMENT INFORMATION The primary source of income for the Company is interest from the purchase or origina- tion of consumer, commercial, agricultural, commercial real estate, and residential real estate loans. The Company accepts deposits from customers in the normal course of business primarily in northwest and central Iowa and eastern South Dakota. The Company operates primarily in the banking industry, which accounts for the majority of its revenues, operating income and assets, with the remaining operations consisting of payment processing services. The Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organ- izes segments within a company for making operating decisions and assessing perform- ance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggre- gates a company. Based on the management approach model, the Company has deter- mined that its business is comprised of two reporting segments. Assets held in trust or fiduciary capacity are not assets of the Company and, accord- ingly, are not included in the accompanying consolidated financial statements. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain sig- nificant estimates include the allowance for loan losses and the fair values of securities and other financial instruments. These estimates are reviewed by management regularly; however, they are particularly susceptible to significant changes in the future. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company’s cash on hand and due from financial institutions and short-term interest- bearing deposits in other financial institutions. The Company reports net cash flows for customer loan transactions, securities purchased under agreement to resell, deposit transactions, securities sold under agreements to repurchase and FHLB advances with terms less than 90 days. The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $5.95 million and $3.56 million at September 30, 2006 and 2005, respectively. The Company at times maintains balances in excess of insured limits at various financial institutions including the Federal Home Loan Bank of Des Moines, the Federal Reserve Bank, and other private institutions. At September 30, 2006 the Company had $79.8 million of interest bearing deposits held at the Federal Home Loan Bank of Des Moines. The Company does not believe these deposits carry a significant risk of loss, but cannot provide assurances that no losses could occur if these institutions were to become insolent. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL Securities purchased under agreement to resell generally mature or reprice within one week and are carried at cost. SECURITIES The Company classifies all securities as available for sale. Available for sale securities are those the Company may decide to sell if needed for liquidity, asset-liability management or other reasons. Available for sale securities are reported at fair value, with net unreal- ized gains and losses reported as other comprehensive income or loss as a separate component of shareholders’ equity, net of tax. Gains and losses on the sale of securities are determined using the specific identifi- cation method based on amortized cost and are reflected in results of operations at the time of sale. Interest and dividend income, adjusted by amortization of purchase premium or discount over the estimated life of the security using the level yield method, is included in income as earned. Declines in the fair value of individual securities below their amortized cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In esti- mating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial con- dition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any antici- pated recovery in fair value. LOANS HELD FOR SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. As assets specifically acquired for resale, the origination of, disposition of and gain/loss on these loans are classified as operating activities in the statement of cash flows. LOANS RECEIVABLE Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances reduced by the allowance for loan losses and any deferred fees or costs on originated loans. Premiums or discounts on purchased loans are amortized to income using the level yield method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Interest income on loans is accrued over the term of the loans based upon the amount of principal outstanding except when serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Interest income is subse- quently recognized only to the extent that cash payments are received until, in manage- ment’s judgment, the borrower has the ability to make contractual interest and principal payments, in which case the loan is returned to accrual status. LOAN ORIGINATION FEES, COMMITMENT FEES AND RELATED COSTS 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. 16 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ALLOWANCE FOR LOAN LOSSES Because some loans may not be repaid in full, an allowance for loan losses is recorded. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management’s periodic evalua- tion of the adequacy of the allowance is based on the Company’s past loan loss experi- ence, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur. Loans are considered impaired if full principal or interest payments are not antici- pated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as a component of the pro- vision for loan losses. The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified either as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative fac- tors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, manufactured homes, home equity and second mortgage loans. Commercial and agricultural loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the bor- rower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or more. Non-accrual loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS Real estate properties and repossessed assets acquired through, or in lieu of, loan fore- closure 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 the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. Valuations are periodically per- formed by management and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. INCOME TAXES The Company records income tax expense based on the amount of taxes due on its 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 liabili- ties, using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. PREMISES AND EQUIPMENT Land is carried at cost. Buildings, furniture, fixtures and equipment are carried at cost, less 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. TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred costs and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. BANK-OWNED LIFE INSURANCE Bank-owned life insurance represents the cash surrender value of investments in life insurance contracts. Earnings on the contracts are based on the earnings on the cash surrender value, less mortality costs. EMPLOYEE STOCK OWNERSHIP PLAN The Company accounts for its employee stock ownership plan (ESOP) in accordance with AICPA Statement of Position (SOP) 93-6. Under SOP 93-6, the cost of shares issued to the ESOP, but not yet allocated to participants, are presented in the consolidated balance sheets as a reduction of shareholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. Dividends on unallocated shares are used to reduce the accrued interest and principal amount of the ESOP’s loan payable to the Company. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in the normal course of business, makes commitments to make loans which are not reflected in the consolidated financial statements. GOODWILL Goodwill is not amortized but is subject to an impairment test at least annually or more often if conditions indicate a possible impairment. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company enters into sales of securities under agreements to repurchase with pri- mary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to repurchase identical securities are collateralized by assets which are held 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 financ- ings, and the obligations to repurchase such securities are reflected as a liability. The securities underlying the agreements remain in the asset accounts of the Company. EARNINGS PER COMMON SHARE Basic earnings per common share is based on the net income divided by the weighted 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; unallocated ESOP shares are not considered outstanding. 17 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diluted earnings per common share shows the dilutive effect of additional potential com- mon shares issuable under stock option plans. COMPREHENSIVE INCOME Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in net unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effects, and is recognized as a separate component of shareholders’ equity. STOCK COMPENSATION Effective October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment, using a modified prospective application. Prior to that date, the Company accounted for stock option awards under APB Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with SFAS No. 123(R), compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant. The recording of such compensation expense began on October 1, 2005 for shares not yet vested as of that date and for all new grants subsequent to that date. Prior years’ results have not been restated. The exercise price of options or fair value of nonvested shares granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock based incentive awards has been negligible. RECLASSIFICATIONS Certain 2005 and 2004 amounts have been reclassified to conform to the 2006 presen- tation. There were no changes to previously reported shareholders’ equity. NEW ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embed- ded derivative that would otherwise require bifurcation in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The statement also sub- jects beneficial interests in securitized financial assets to the requirements of SFAS No. 133. For the Company, this statement is effective for all financial instruments acquired, issued, or subject to remeasurement after the beginning of its fiscal year that begins after September 15, 2006, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operation and cash flows. In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” The statement amends SFAS No. 140 by (1) requiring the separate accounting for servicing assets and servicing liabilities, which arise from the sale of financial assets; (2) requiring all separately recog- nized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; and (3) permitting an entity to choose between an amortization method or a fair value method for subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years begin- ning after September 15, 2006, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operation and cash flows. In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet in order for the position to be recognized within the financial statements and pro- vides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions. This interpreta- tion is effective for fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company is currently evaluating the impact that the adoption of this inter- pretation will have on its financial position, results of operation and cash flows. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transac- tion between market participants in the market in which the reporting entity transacts. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operation and cash flows. In September 2006, the FASB issued Statement No. 158, (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires a company that sponsors a postretirement benefit plan to fully recognize, as an asset or liability, the over- or under-funded status of its benefit plan in its balance sheet. The funded status is measured as the difference between the fair value of the plan’s assets and its benefit obligation (projected benefit obligation for pension plans and accumulated postretirement benefit obligation for other postretirement benefit plans). Currently, the funded status of such plans are reported in the notes to the financial statements. This provision is effective for public companies for fiscal years ending after December 15, 2006. In addition, SFAS No. 158 also requires a company to measure its plan assets and benefit obligations as of its year end balance sheet date. Currently, a company is permit- ted to choose a measurement date up to three months prior to its year end to measure the plan assets and obligations. This provision is effective for all companies for fiscal years ending after December 15, 2008. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operation and cash flows. 18 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 and diluted earnings per common share is presented below: Basic earnings (loss) per common share: Numerator, net income (loss) 2006 2005 2004 $ 3,920,962 $ (924,251) $ 3,987,050 Denominator, weighted average common shares outstanding Less weighted average unallocated ESOP and nonvested shares 2,511,754 (27,949) 2,497,954 (37,063) 2,498,403 (16,724) Weighted average common shares outstanding 2,483,805 2,460,891 2,481,679 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 effect of assumed exercises of stock options, net of tax benefits Weighted average common and dilutive potential common shares outstanding Basic earnings (loss) per common share $ $ $ $ $ 1.58 3,920,962 2,483,805 38,052 $ $ (0.38) (924,251) 2,460,891 - 1.61 3,987,050 2,481,679 52,744 2,521,857 2,460,891 2,534,423 1.55 $ (0.38) $ 1.57 The calculation of the diluted loss per share for the year ended September 30, 2005 does not reflect the assumed exercise of 46,624 stock options because the effect would have been anti-dilutive due to the net loss for the period. Stock options totaling 99,355, 60,315, and 91,315 were not considered in computing diluted earnings per common share for the years ended September 30, 2006, 2005, and 2004, respectively, because they were not dilutive. NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL In September 2005, the Company entered into a contract to assume the processing of a gift card portfolio. As part of the contract, the funds supporting the outstanding balances of the portfolio were invested in securities purchased under an agreement to resell through Bank of America. The contract provides for a fixed rate of return of 4.50% during its term. The investment in securities purchased under an agreement to resell matures weekly. Prior to reinvestment, the balance is reduced by an esti- mate of the amount that will be needed to cover gift card settlements the following week. The estimated amount, along with the previous week’s interest, is wired to the Company. The securities purchased under this agreement are comprised of U.S. Government agency securities. 19 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. SECURITIES Year end securities available for sale were as follows: 2006 Debt securities Trust preferred and corporate securities Obligations of states and political subdivisions Mortgage-backed securities Other Total debt securities Marketable equity securities Total securities 2005 Debt securities Trust preferred and corporate securities Obligations of states and political subdivisions Mortgage-backed securities Total debt securities Marketable equity securities Total securities AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES 113,881 - 14,728 - 128,609 339,118 467,727 $ $ (608,228) (1,342) (7,110,988) (247) (7,720,805) - $ (7,720,805) $ FAIR VALUE 26,278,462 144,876 158,701,893 109,450 185,234,681 941,449 186,176,130 GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE 123,965 349 31,615 155,929 277,814 433,743 $ $ (735,248) (2,609) (4,762,913) (5,500,770) - $ (5,500,770) $ 26,650,450 440,869 202,921,101 230,012,420 880,145 230,892,565 $ $ $ $ 26,772,809 146,218 165,798,153 109,697 192,826,877 602,331 193,429,208 AMORTIZED COST 27,261,733 443,129 207,652,399 235,357,261 602,331 235,959,592 $ $ $ $ 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, 2006 and 2005 are as follows: 2006 LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Debt securities Trust preferred and corporate securities Obligations of states and political subdivisions Mortgage-backed securities Other Total debt securities $ $ - - 777,037 109,450 886,487 $ $ - - (15,222) (247) (15,469) $ 24,165,062 94,876 157,720,348 $ (608,228) (1,342) (7,095,766) - - $ 181,980,286 $ (7,705,336) $ 24,165,062 94,876 158,497,385 109,450 $182,866,773 $(608,228) (1,342) (7,110,988) (247) $ (7,720,805) 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 and corporate securities Obligations of states and political subdivisions Mortgage-backed securities Total debt 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) As of September 30, 2006, the investment portfolio included 43 securities with current unrealized losses which have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, no other-than-temporary impairment was recorded at September 30, 2006. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obli- gations with or without call or prepayment penalties. Marketable equity securities are not included in the following maturity summary. 20 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 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 Commercial and multi-family real estate loans Agricultural real estate loans Consumer loans Commercial business loans Agricultural business loans Less: Allowance for loan losses Undisbursed portion of loans in process Net deferred loan origination fees Amortized Cost 255,915 999,519 25,773,290 27,028,724 165,798,153 192,826,877 $ $ Fair Value 254,326 1,002,800 25,275,662 26,532,788 158,701,893 185,234,681 $ $ 2006 2005 2004 $ $ - - - 25,842,710 221,868 (241,202) $ - - - 2006 2005 59,330,439 167,590,032 16,146,672 31,164,854 92,384,484 30,064,102 396,680,583 (5,967,774) (1,772,894) (178,004) 388,761,911 $ 70,165,219 214,048,999 15,245,600 31,663,259 101,772,452 24,528,747 457,424,276 (7,222,404) (9,732,776) (278,851) 440,190,245 2005 2004 5,370,994 5,482,000 146,820 (3,777,410) 7,222,404 $ $ 4,961,777 488,500 29,210 (108,493) 5,370,994 $ $ $ $ Annual activity in the allowance for loan losses was as follows: Beginning balance Provision for loan losses Recoveries Charge offs Ending balance 2006 7,222,404 (454,500) 329,180 (1,129,310) 5,967,774 $ $ Virtually all of the Company’s originated loans are to Iowa- and South Dakota-based indi- viduals and organizations. The Company’s purchased loans totaled approximately $50,752,562 at September 30, 2006, and were secured by properties located, as a per- centage of total loans, as follows: 4% in Iowa, 2% in Arizona, 1% each in Minnesota, South Dakota, Illinois, Florida, California, and Washington, and the remaining 1% in eight other states. The Company’s purchased loans totaled approximately $60,968,000 at September 30, 2005, and were secured by properties located, as a percentage of total loans, as follows: 1% in Washington, 1% in Colorado, 2% in Minnesota, 3% in Iowa, 2% in Arizona, 1% in Missouri and the remaining 3% in 12 other states. The Company originates and purchases commercial real estate loans. These loans are considered by management to be of somewhat greater risk of uncollectibility due to the dependency on income production. The Company’s commercial real estate loans include $10,424,000 of loans secured by hotel properties and $29,957,000 million of multi-family properties at September 30, 2006. The Company’s commercial real estate loans include $33,554,000 of loans secured by hotel properties and $45,566,000 of multi-family properties at September 30, 2005. The remainder of the commercial real estate portfolio is diversified by industry. The Company’s policy for requiring collateral and guarantees varies with the creditworthiness of each borrower. 21 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 2006 2005 $ $ - 4,100,265 839,508 4,402,198 - 664,056 250,803 1,701,941 Interest income and cash interest collected on impaired loans was not material during the years ended September 30, 2006, and 2005, and 2004. 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 NOTE 7. PREMISES AND EQUIPMENT, NET Year end premises and equipment were as follows: Land Buildings Furniture, fixtures, and equipment Less accumulated depreciation 2006 2005 22,900,000 25,800,000 48,700,000 2006 2,858,410 13,481,353 8,806,715 25,146,478 (7,523,418) 17,623,060 $ $ $ $ 25,241,000 26,039,000 51,280,000 2005 2,858,410 12,484,587 6,021,614 21,364,611 (6,238,542) 15,126,069 $ $ $ $ Depreciation of premises and equipment included in occupancy and equipment expense was approximately $1,276,000, $999,000, and $917,000 for the years ended September 30, 2006, 2005, and 2004, respectively. NOTE 8. DEPOSITS Certificates of deposit in denominations of $100,000 or more were approximately $44.3 million and $128.2 million at September 30, 2006, and 2005, respectively. At September 30, 2006, the scheduled maturities of certificates of deposit were as follows for the years ending September 30: NOTE 9. ADVANCES FROM THE FEDERAL HOME LOAN BANK At September 30, 2006, the Company’s advances from the FHLB of Des Moines had fixed rates ranging from 2.56% to 7.19% with a weighted average rate of 4.97%. The scheduled maturities of FHLB advances were as follows for the years ending September 30: 2007 2008 2009 2010 2011 Thereafter $ $ 151,996,116 35,404,213 14,512,695 11,357,984 2,927,265 18,575 216,216,848 2007 2008 2009 2010 2011 Thereafter $ $ 25,265,000 25,000,000 12,000,000 20,000,000 10,000,000 7,300,000 99,565,000 Advances totaling $31.7 million, with a weighted average fixed rate of 5.75%, carry quarterly call provisions, whereby the FHLB can elect to accelerate the maturity of these borrowings. These advances are shown in the above table at their stated maturity date, which range from 2008 to 2010. As of September 30, 2005, the Company’s FHLB advance portfolio totaled $159,705,000 and carried a weighted average rate of 4.56%. MetaBank and MBWC have executed blanket pledge agreements whereby the Banks assign, transfer, and pledge to the FHLB and grant to the FHLB a security interest in all 22 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS mortgage collateral and securities collateral. The Banks have the right to use, commingle, and dispose of the collateral they have assigned to the FHLB. Under the agreements, the Banks must maintain “eligible collateral” that has a “lending value” at least equal to the “required collateral amount,” all as defined by the agreements. At year end 2006, and 2005, the Banks collectively pledged securities with fair values of approximately $54.6 million and $103.4 million, respectively, against specific FHLB advances. In addition, qualifying mortgage loans of approximately $79.1 million, and $89.8 million were pledged as collateral at September 30, 2006 and 2005, respectively. NOTE 10. SECURITIES SOLD UNDER AGREEMENTS semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions are required to be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has the option to shorten the maturity date to a date not earlier than July 25, 2006. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption plus, if redeemed prior to July 25, 2011, a redemption premium as defined in the Indenture agreement. Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s common stock. TO REPURCHASE Securities sold under agreements to repurchase totaled approximately $15.2 million and $20.5 million at September 30, 2006 and 2005, respectively. Although the securities issued by the trusts are not included as a component of shareholders’ equity, the securities are treated as capital for regulatory purposes, subject to certain limitations. An analysis of securities sold under agreements to repurchase follows: Highest month-end balance Average balance Weighted average interest rate during the period Weighted average interest rate at end of period 2006 2005 $ 20,369,469 16,616,456 $ 33,077,141 28,066,924 3.01% 3.13% 2.78% 2.89% At September 30, 2006, securities sold under agreements to repurchase had a weighted average maturity of less than five months. The Company pledged securities with fair values of approximately $20.5 million and $22.3 million at September 30, 2006 and 2005, respectively, as collateral for securities sold under agreements to repurchase. NOTE 11. JUNIOR SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES Subordinated debentures are due to First Midwest Financial Capital Trust I, a 100%- owned unconsolidated subsidiary of the Company. The debentures were issued in 2001 in conjunction with the Trust’s issuance of 10,000 shares of Trust Preferred Securities. The debentures bear the same interest rate and terms as the trust preferred securities. The debentures are included on the balance sheet as liabilities, net of applicable unamortized issuance costs. The Company issued all of the 10,000 authorized shares of trust preferred securities of First Midwest Financial Capital Trust I holding solely subordinated debt securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a variable rate of LIBOR (as defined) plus 3.75% (9.30% at September 30, 2006 and 7.67% at September 30, 2005), not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive NOTE 12. EMPLOYEE STOCK OWNERSHIP AND PROFIT SHARING PLANS The Company maintains an Employee Stock Ownership Plan (ESOP) for eligible employ- ees who have 1,000 hours of employment with the Bank, have worked one year at the Bank and who have attained age 21. The ESOP has borrowed money from the Company to purchase shares of the Company’s common stock. Shares purchased by the ESOP are held in suspense for allocation among participants as the loan is repaid. ESOP expense of $356,697, $305,068 and $291,018 was recorded for the years ended September 30, 2006, 2005 and 2004, respectively. Contributions of $315,856, $253,842 and $219,310 were made to the ESOP during the years ended September 30, 2006, 2005 and 2004, respectively. Contributions to the ESOP and shares released from suspense in an amount propor- tional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after seven years of credited service. Prior to the completion of seven years of credited service, a participant who terminates employment for reasons other than death or dis- ability receives a reduced benefit based on the ESOP’s vesting schedule. Forfeitures are reallocated among remaining participating employees in the same proportion as contribu- tions. Benefits are payable in the form of stock upon termination of employment. The Company’s contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. For the years ended September 30, 2006, 2005 and 2004, 14,500, 14,000 and 13,000 shares with a fair value of $24.60, $21.79 and $22.37 per share, respectively, were released. Also for the years ended September 30, 2006, 2005 and 2004, allocated shares and total ESOP shares reflect 11,332, 45,042, and 15,056 shares, respectively, withdrawn from the ESOP by participants who are no longer with the Company or by par- ticipants diversifying their holdings and 5,358, 5,152, and 5,426 shares, respectively, purchased for dividend reinvestment. Year-end ESOP shares are as follows: Allocated shares Unearned shares Total ESOP shares 2006 238,454 22,312 260,766 2005 229,928 36,812 266,740 2004 255,818 20,812 276,630 Fair value of unearned shares $ 548,875 $ 686,912 $ 462,859 The Company also has a profit sharing plan covering substantially all full-time employees. Contribution expense for the years ended September 30, 2006, 2005, and 2004 was $322,226, $233,453, and $276,923, respectively. 23 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. SHARE BASED COMPENSATION PLANS The Company maintains the 2002 Omnibus Incentive Plan, which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company. Awards are granted by the Stock Option Committee of the Board of Directors based on the performance of the award recipients, or other relevant factors. Effective October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment using a modified prospective application. Prior to adopting this standard the Company accounted for stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees. As a result of the adoption of SFAS No. 123 (R), the Company, dur- ing the year ended September 30, 2006, began recording expense associated with the awarding of stock options and restricted stock. Prior years’ results have not been restated to reflect the impact of this change. The following tables show the effect to income, net of tax benefits, of share-based expense recorded in the year ended September 30, 2006, as well as the pro forma effect to income and earnings per share had the Company used the accounting methodology under SFAS No. 123(R) for fiscal years 2005 and 2004. YEAR ENDED SEPTEMBER 30, Total employee stock-based compensation 2006 2005 2004 expense recognized in income, net of tax effects of $163,580 $ 317,537 $ - $ - YEAR ENDED SEPTEMBER 30, Net income (loss) as reported Deduct: Total employee stock- based compensation expense determined under fair value based method for all awards, net of tax effects Pro forma net income (loss) Earnings (loss) per common share—basic As reported Pro forma Earnings (loss) per common share—diluted As reported Pro forma $ $ 2005 2004 (924,251) $ 3,987,050 (154,126) (1,078,377) (229,967) 3,757,083 $ (0.38) (0.44) (0.38) (0.44) 1.61 1.51 1.57 1.48 As of September 30, 2006, stock based compensation expense not yet recognized in income totaled $620,126. which is expected to be recognized over a weighted average remain- ing period of 1.45 years. At grant date, the fair value of options awarded to recipients is estimated using a Black-Scholes valuation model. The exercise price of stock options equals the fair market value of the underlying stock at the date of grant. The following table shows the key valuation assumptions used for options granted during the years ended September 30, 2006, 2005, and 2004, and other information. Options are issued for 10 year periods with 100% vesting generally occurring either at grant date or over a four year period. YEAR ENDED SEPTEMBER 30, Risk-free interest rate Expected annual standard deviation Range Weighted average Expected life (years) Expected dividend yield Range Weighted average Weighted average fair value of options granted during period Intrinsic value of options exercised during period 2006 2005 2004 4.40% - 5.09% 4.30% 3.83% - 4.42% 19.46% - 20.60% 19.93% 7 2.13% - 2.55% 2.32% $ $ 5.51 217,760 $ $ 20.60% 20.60% 7 2.76% 2.76% 4.03 98,446 21.85% - 22.45% 22.16% 7 2.18% - 2.54% 2.26% $ $ 5.32 262,980 24 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Although authorized under the Company’s 2002 Omnibus Incentive Plan, the Company had not, prior to fiscal year 2006, awarded nonvested (restricted) shares to employees or direc- tors. The Company did award nonvested shares during the year ended September 30, 2006. Nonvested shares vest immediately or over a period of four years. The following table shows the weighted average fair value of nonvested shares awarded and the total fair value of novested shares which vested during the year ended September 30, 2006. The fair value is determined based upon the fair market value of the Company’s stock on the grant date. YEAR ENDED SEPTEMBER 30, Weighted average fair value of nonvested shares granted during period Total fair value of nonvested shares vested during period 2006 2005 2004 $ $ 24.43 89,585 n/a n/a n/a n/a In addition to the Company’s active 2002 Omnibus Incentive Plan, the Company also maintains the 1995 Stock Option and Incentive Plan, and the 1993 Stock Option and Incentive Plan. No new options were, or could have been, awarded under the 1995 and 1993 plans during the year ended September 30, 2006; however previously awarded but unexercised shares were outstanding under these plans during the year. The following tables shows the activity of options and nonvested shares granted, exercised, or forfeited under all of the Company’s option and incentive plans during the year ended September 30, 2006. Options outstanding, September 30, 2005 Granted Exercised Forfeited or expired Options outstanding, September 30, 2006 Options exercisable end of year Nonvested shares outstanding, September 30, 2005 Granted Vested Forfeited or expired Nonvested shares outstanding, September 30, 2006 WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YRS) AGGREGATE INTRINSIC VALUE $ $ $ 18.11 23.16 14.57 20.71 19.79 18.74 5.99 $ 668,629 6.65 5.75 $ $ 1,792,717 1,575,099 NUMBER OF SHARES 311,328 114,903 (28,250) (11,556) 386,425 276,925 NUMBER OF SHARES WEIGHTED AVERAGE MKT VAL AT GRANT $ - 12,000 (3,667) - - 24.43 24.43 - 8,333 $ 24.43 On August 28, 2006, the Board of Directors approved the First Amendment to the Company’s 2002 Omnibus Incentive Plan, which, among other things, increased the number of shares eligible for award under the plan from 200,000 to 400,000. This Amendment is subject to shareholder approval at the Company’s annual meeting scheduled for January 2007. The preceding option table includes 28,701 options granted subject to final approval by the Company’s shareholders. 25 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes consists of: Years ended September 30, Federal: Current Deferred State: Current Deferred Income tax expense (benefit) Total income tax expense (benefit) differs from the statutory federal income tax rate as follows: Years ended September 30, Income tax expense (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 2006 2005 2004 $ $ $ $ 1,331,116 290,820 1,621,936 282,855 45,019 327,874 1,949,810 $ $ $ $ 115,151 (670,140) (554,989) (46,076) (83,620) (129,696) (684,685) $ $ $ $ 2,120,464 (333,905) 1,786,559 288,092 (15,953) 272,139 2,058,698 2006 2005 2004 $ 2,055,000 $ (563,000) $ 2,116,000 171,335 (217,175) (59,350) (26,000) (165,000) 69,315 191,000 (186,000) (62,302) Total income tax expense (benefit) $ 1,949,810 $ (684,685) $ 2,058,698 Year-end deferred tax assets and liabilities included in other assets consist of: September 30, DEFERRED TAX ASSETS: Bad debts Stock based compensation Net unrealized losses on securities available for sale Other, net Deferred tax liabilities: FHLB stock dividend Premises and equipment Deferred loan fees Net deferred tax assets 2006 2005 $ $ 2,225,650 90,862 2,705,421 120,813 5,142,746 2,694,000 - 1,886,420 75,589 4,656,009 (452,000) (476,575) (140,000) (1,068,575) (452,000) (463,000) (150,000) (1,065,000) $ 4,074,171 $3,591,009 Federal income tax laws provided savings banks with additional bad debt deductions through September 30, 1987 totaling $6,744,000 for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total approximately $2,300,000 at September 30, 2006, and 2005. If the Bank were to be liquidated or otherwise cease to be a bank, or if tax laws were to change, the $2,300,000 would be recorded as expense. 26 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS The Company has two primary subsidiaries, MetaBank and MBWC. MetaBank and MBWC are subject to various regulatory capital requirements. Failure to meet mini- mum capital requirements can initiate certain mandatory or discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, MetaBank and MBWC must meet specific quantitative capi- tal guidelines using their assets, liabilities and certain off-balance-sheet items as cal- culated under regulatory accounting practices. The requirements are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require MetaBank and MBWC to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier I capital (as defined in the regula- tions) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier I capital (as defined) to average assets (as defined). As of September 30, 2006, MetaBank and MBWC met all capital adequacy requirements. MetaBank’s and MBWC’s actual and required capital amounts and ratios are presented in the following table. MINIMUM MINIMUM REQUIREMENT REQUIREMENT FOR TO BE WELL CAPITALIZED CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS Amount Ratio Amount Ratio Amount Ratio Dollars in thousands) AS OF SEPTEMBER 30, 2006: MetaBank Tangible capital (to tangible assets) Tier 1 (core) capital (to adjusted total assets) Total risk based capital (to risk weighted assets) MetaBank West Central Tier 1 capital (to average assets) Tier 1 risk based capital (to risk weighted assets) Total risk based capital (to risk weighted assets) AS OF SEPTEMBER 30, 2005: MetaBank Tangible capital (to tangible assets) Tier 1 (core) capital (to adjusted total assets) Total risk based capital (to risk weighted assets) MetaBank West Central Tier 1 capital (to average assets) Tier 1 risk based capital (to risk weighted assets) Total risk based capital (to risk weighted assets) $ $ 48,609 48,609 54,401 4,071 4,071 4,338 46,412 46,412 52,857 3,762 3,762 4,162 6.97% $ 6.97% 12.21% 10,462 27,899 35,652 1.50% $ 4.00% 8.00% - 34,874 44,565 9.71% 14.90% 15.87% 1,677 1,093 2,186 4.00% 4.00% 8.00% 2,097 1,640 2,733 6.38% $ 6.38% 10.33% 10,911 29,065 40,944 1.50% $ 4.00% 8.00% - 36,332 51,180 7.37% 11.73% 12.98% 2,042 1,277 2,566 4.00% 4.00% 8.00% 2,553 1,915 3,208 - 5.00% 10.00% 5.00% 6.00% 10.00% - 5.00% 10.00% 5.00% 6.00% 10.00% Regulations limit the amount of dividends and other capital distributions that may be paid by a financial institution without prior approval of its primary regulator. The regulatory restric- tion is based on a three-tiered system with the greatest flexibility being afforded to well-capitalized (Tier 1) institutions. MetaBank and MBWC are currently Tier 1 institutions. Accordingly, MetaBank and MBWC can make, without prior regulatory approval, distributions during a calendar year up to 100% of their retained net income for the calendar year-to- date plus retained net income for the previous two calendar years (less any dividends previously paid) as long as they remain well-capitalized, as defined in prompt corrective action regulations, following the proposed distribution. Accordingly, at September 30, 2006, approximately $2.7 million of MetaBank’s retained earnings and none of MBWC’s retained earnings were potentially available for distribution to the Company. 27 -Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company’s subsidiary banks make various commit- ments to extend credit which are not reflected in the accompanying consolidated finan- cial statements. chisor-defendants and was purchased and employed by the franchisee-defendants. It appears that the principal basis for naming the MetaBank Defendants is that they loaned money to finance some of the defendants’ business operations, purportedly with some degree of knowledge about the defendants’ allegedly abusive consumer practices. At September 30, 2006 and 2005, unfunded loan commitments approximated $52.9 million and $69.6 million respectively, excluding undisbursed portions of loans in process. Unfunded loan commitments at September 30, 2006 and 2005 were principally for variable rate loans. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract. The exposure to credit loss in the event of nonperformance by other parties to finan- cial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance- sheet instruments. Since certain commitments to make loans and to fund lines of credit and loans in process expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Securities with fair values of approximately $26,402,000 and $63,313,000 at September 30, 2006 and 2005, respectively, were pledged as collateral for public funds on deposit. Securities with fair values of approximately $8,931,000 and $13,400,000 at September 30, 2006 and 2005, respectively, were pledged as collateral for individual, trust and estate deposits. Under employment agreements with certain executive officers, certain events leading to separation from the Company could result in cash payments totaling approximately $2.8 million as of September 30, 2006. LEGAL PROCEEDINGS MetaBank has been named in several lawsuits whose eventual outcome could have an adverse effect on the consolidated financial position or results of operations of the Company. Because the likelihood or amount of an adverse resolution to these matters cannot currently be assessed, the Company has not recorded a contingent liability related to these potential claims. On June 11, 2004, the Sioux Falls School District filed suit in the Second Judicial Circuit Court alleging that MetaBank, a wholly-owned subsidiary of the Company, improp- erly allowed funds, which belonged to the school district, to be deposited into, and sub- sequently withdrawn from, a corporate account established by an employee of the school district. The school district is seeking in excess of $600,000. MetaBank has submitted the claim to its insurance carrier, and is working with counsel to vigorously contest the suit. On or about March 10, 2006, plaintiffs filed five class-action suits on behalf of them- selves and all other purchasers of vehicles from Prairie Auto Group, Inc., Dan Nelson Automotive Group, Inc.’s Rapid City, South Dakota location, and other not-yet-identified auto sales entities owned or operated by defendants. Each complaint states that it is a “companion” to the other four and names the same defendants (approximately twenty- five) including the Company and affiliates thereof (the “MetaBank Defendants”). None of these complaints has yet been served on any of the MetaBank Defendants. The thrust of the complaints is that plaintiffs allegedly suffered damages as a result of a scheme by defendants to use fraudulent statements, misrepresentations and omissions to sell vehi- cles and extended warranties to plaintiffs. Plaintiffs claim that they and other similarly sit- uated purchasers paid too much for their vehicles and were induced to buy warranties that were not honored and otherwise proved worthless. Plaintiffs allege that defendants reaped considerable profits through fraudulent sales methods; by refusing to make war- rantied repairs; and by engaging in usurious repossession and resale practices. Plaintiffs allege that these practices were part of a business plan that originated with the fran- In addition to seeking certification as a class, plaintiffs seek cancellation of the auto- mobile purchase contracts; monetary damages including the initial purchase price war- ranty charges, finance costs and related repossession and other charges; costs of allegedly warrantied repairs that were not made by defendants; consequential damages relating to the alleged wrongful repossession of vehicles and deficiency judgments asso- ciated therewith; damages for emotional and mental suffering; punitive and treble dam- ages; and attorneys’ fees. The amount of the alleged damages is not specified in the complaints. During the third fiscal quarter of 2005, the company determined that $9.8 million of its assets were impaired under generally accepted accounting principles. The Company was the lead lender and servicer of approximately $32.0 million in loans to three auto- dealership related companies andtheir owners. Approximately $22.2 million of the total had been sold to ten participating financial institutions. Each participation agreement with the ten participant banks provides that the participant bank shall own a specified per- centage of the outstanding loan balance at any give time. Each agreement also recites the maximum amount that can be loaned by MetaBank on that particular loan. MetaBank allocated to some participants an ownership in the outstanding loan balance in excess of the percentage specified in the participation agreement. MetaBank believes that in each instance this was done with the full knowledge and consent of the participant. Several participants have demanded that their participations be adjusted to match the percent- age specified in the participant agreement. Based on the total loan recoveries projected as of September 30, 2006, MetaBank calculated that it would cost approximately $953,000 to adjust these participations as the participants would have them adjusted. A few participants have more recently asserted that MetaBank owes them additional monies based on additional legal theories. MetaBank denies any obligation to make the requested adjustments on these or related claims. Other than as described below, MetaBank cannot predict at this time whether any of these claims will be the subject of litigation. Four lawsuits were filed against the Company’s MetaBank subsidiary in 2006. Three of the complaints are related to the Company’s alleged actions in connection with its activities as lead lender to three companies involved in auto sales, service, and financing and their owner. The fourth complaint alleges patent infringement. All four actions are in their infancy and materiality cannot be determined at this time. The Company intends, however, to vigorously defend its actions. On June 28, 2006, First Midwest Bank-Deerfield Branches and Mid-Country Bank filed suit against MetaBank in South Dakota’s Second Judicial Circuit Court, Minnehaha County. The complaint alleges that plaintiff banks, who were participating lenders with MetaBank on a series of loans made to Dan Nelson Automotive Group (“DNAG”) and South Dakota Acceptance Corporation (“SDAC”), suffered damages exceeding $1 million as a result of MetaBank’s placement and administration of the loans that were the sub- ject of the loan participation agreements. On July 17, 2006, MetaBank removed the case from state court to the United States District Court. On July 5, 2006, First Premier Bank filed suit against MetaBank in South Dakota’s Second Judicial Circuit Court, Minnehaha County. The complaint alleges that First Premier, a participating lender with MetaBank on a series of loans made to SDAC, has suffered damages in an as yet undetermined amount as a result of MetaBank’s actions in selling to First Premier a participation in a loan made to SDAC and MetaBank’s actions in administering that loan. On July 17, 2006, MetaBank removed the case from state court to the United States District Court. On June 26, 2006, Home Federal Bank filed suit against MetaBank and two individ- uals, J. Tyler Haahr and Daniel A. Nelson, in South Dakota’s Second Judicial Circuit Court, Minnehaha County. The complaint alleges that Home Federal, a participating lender with MetaBank on a series of loans made to DNAG and SDAC, suffered damages exceeding 28 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $3.8 million as a result of failure to make disclosures regarding an investigation of Nelson, DNAG and SDAC by the Iowa Attorney General at the time Home Federal agreed to an extension of the loan participation agreements. Subject to a reservation of rights, the Company’s insurance carrier has agreed to cover the three claims described above. On July 21, 2006, Meridian Enterprises Corporation (“Meridian”) filed suit against Meta Financial Group, Inc. (Meta Payment Systems division) (“Meta”) and other banks and financial institutions in U.S. District Court. The complaint alleges that Meta infringed on a patent owned by Meridian. Meta is vigorously contesting the suit. There are no other material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. NOTE 17. LEASE COMMITMENTS The Company has leased property under various noncancelable operating lease agree- ments which expire at various times through 2024, and require annual rentals ranging from $3,000 to $118,000 plus the payment of the property taxes, normal maintenance, and insurance on the property. The following table shows the total minimum rental commitment at September 30, 2006, under the leases. 2007 2008 2009 2010 2011 Thereafter $ $ 301,576 304,559 299,531 268,219 217,750 796,803 2,188,438 NOTE 18. SEGMENT REPORTING An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. The Company has determined that it has two reportable segments: The tra- ditional banking segment consisting of its two banking subsidiaries, MetaBank and MetaBank West Central, and Meta Payment Systems, a division of MetaBank. MetaBank and MetaBank West Central operate as traditional community banks providing deposit, loan, and other related products to individuals and small businesses, primarily in the communities where their offices are located. Meta Payment Systems provides a number of products and services, primarily to third parties, including financial institutions and other businesses. These products and services include issuance of prepaid debit cards, sponsorship of ATMs into the debit networks, ACH origination services, and a gift card program. Other related programs are in the process of development. The remaining grouping under the caption “All Others” consists of the operations of the Meta Financial Group, Inc. and Meta Trust Company. Transactions between affiliates, the resulting revenues of which are shown in the inter- segment revenue category, are conducted at market prices, meaning prices that would be paid if the companies were not affiliates. YEAR ENDED SEPTEMBER 30, 2006 Net interest income (loss) Provision for loan losses Non-interest income Non-interest expense Net income (loss) before tax Income tax expense (benefit) Net income (loss) Inter-segment revenue (expense) Total assets Total deposits YEAR ENDED SEPTEMBER 30, 2005 Net interest income (loss) Provision for loan losses Non-interest income Non-interest expense Net income (loss) before tax Income tax expense (benefit) Net income (loss) Inter-segment revenue (expense) Total assets Total deposits YEAR ENDED SEPTEMBER 30, 2004 Net interest income (loss) Provision for loan losses Non-interest income Non-interest expense Net income (loss) before tax Income tax expense (benefit) Net income (loss) Inter-segment revenue (expense) Total assets Total deposits TRADITIONAL BANKING PAYMENT SYSTEMS ALL OTHERS TOTAL $ $ $ $ $ $ $ $ $ 4,036,927 - 10,743,642 8,109,772 6,670,797 2,168,151 4,502,646 3,162,873 166,556,254 163,113,803 410,538 - 1,591,031 3,247,205 (1,245,636) (438,000) (807,636) 365,442 70,905,966 72,537,278 7 - 3,611 770,609 (766,991) (277,000) (489,991) 3,200 145,353 38,013 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (746,508) - 102,238 2,161,274 (2,805,544) (869,869) (1,935,675) - 2,966,709 - (454,554) - (375,041) 778,577 (1,608,172) (533,379) (1,074,793) - 1,016,178 - (316,450) - 101,033 974,724 (1,190,141) (404,648) (785,493) - 60,199,249 - 19,636,040 (454,500) 13,405,857 27,625,625 5,870,772 1,949,810 3,920,962 - 741,132,033 565,710,575 19,239,515 5,482,000 3,730,607 19,097,058 (1,608,936) (684,685) (924,251) - 775,839,262 541,041,578 17,769,071 488,500 3,595,769 14,830,592 6,045,748 2,058,698 3,987,050 - 780,798,524 461,580,877 $ $ $ $ $ $ $ $ $ 16,345,621 (454,500) 2,559,977 17,354,579 2,005,519 651,528 1,353,991 (3,162,873) 571,609,070 402,596,772 19,283,531 5,482,000 2,514,617 15,071,276 1,244,872 286,694 958,178 (365,442) 703,917,118 468,504,300 18,085,514 488,500 3,491,125 13,085,259 8,002,880 2,740,346 5,262,534 (3,200) 720,453,922 461,542,864 29 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, 2006 AND 2005 ASSETS Cash and cash equivalents Securities available for sale Investment in subsidiaries Loan receivable from ESOP Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Loan payable to subsidiaries Subordinated debentures Other liabilities Total liabilities SHAREHOLDERS’ EQUITY Common Stock Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) Unearned Employee Stock Ownership Plan shares Treasury stock, at cost Total shareholders’ equity Total liabilities and shareholders’ equity CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004 Dividend income from subsidiaries Other income Total income Interest expense Other expense Total expense Income before income taxes and equity in undistributed net income of subsidiaries Income tax (benefit) $ $ $ $ $ $ $ 2006 2005 1,849,225 1,678,624 51,751,058 509,201 140,638 55,928,746 710,000 9,831,256 55,822 10,597,078 29,580 20,968,492 37,186,249 (4,547,719) (509,201) (7,795,733) 45,331,668 55,928,746 $ $ $ $ $ $ 51,676 2,177,472 50,598,010 825,057 715,002 54,367,217 1,200,000 9,800,320 408,207 11,408,527 29,580 20,646,513 34,557,258 (3,180,607) (825,057) (8,268,997) 42,958,690 54,367,217 2005 2004 $ 2,510,000 303,755 2,813,755 761,799 1,060,084 1,821,883 2,300,000 317,635 2,617,635 634,083 752,257 1,386,340 991,872 1,231,295 (503,000) (354,000) $ 2006 3,700,000 190,779 3,890,779 936,149 1,956,224 2,892,373 998,406 (834,531) Income before equity in undistributed net income (loss) of subsidiaries 1,832,937 1,494,872 1,585,295 Equity in undistributed net income (loss) of subsidiaries 2,088,025 (2,419,123) 2,401,755 Net income (loss) $ 3,920,962 $ (924,251) $ 3,987,050 30 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 20043 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activites Equity in undistributed net (income) loss of subsidiaries Change in other assets Change in other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiary Maturity of securities Loan to ESOP Net change in loan receivable Repayments on loan receivable from ESOP Net cash provided by investment activites CASH FLOWS FROM FINANCING ACTIVITIES Net change in loan payable to subsidiaries Cash dividends paid Proceeds from exercise of stock options Purchase of treasury stock Net cash (used in) financing activities Net change in cash and cash equivalents CASH AND CASH EQUIVALENTS Beginning of year End of year 2006 2005 2004 $ 3,920,962 $ (924,251) $ 3,987,050 (2,088,025) 574,364 244,205 2,651,506 (75,000) 500,000 - - 315,856 740,856 (490,000) (1,291,971) 187,158 - (1,594,813) 1,797,549 51,676 1,849,225 $ $ 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) (58,443) 110,119 51,676 $ $ (2,401,755) 365,401 (70,949) 1,879,747 - - (212,400) 46,071 219,310 52,981 (350,000) (1,286,533) 582,557 (906,650) (1,960,626) (27,898) 138,017 110,119 $ $ 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. 31 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) FISCAL YEAR 2006 Interest income Interest expense Net interest income Provision for loan losses Net income (loss) Earnings (loss) per common and common equivalent share: Basic Diluted Dividend declared per share FISCAL YEAR 2005 Interest income Interest expense Net interest income Provision for loan losses Net income (loss) Earnings (loss) per common and common equivalent share: Basic Diluted Dividend declared per share FISCAL YEAR 2004 Interest income Interest expense Net interest income Provision for loan losses Net income (loss) Earnings (loss) per common and common equivalent share: Basic Diluted Dividend declared per share December 31 March 31 June 30 September 30 QUARTER ENDED $ $ $ $ $ $ $ $ $ $ $ $ 10,176,873 5,456,620 4,720,253 40,500 515,420 0.21 0.21 0.13 9,784,691 5,097,674 4,687,017 177,000 441,942 0.18 0.18 0.13 9,053,707 4,585,909 4,467,798 101,000 976,942 0.39 0.39 0.13 $ $ $ $ $ $ 10,194,707 5,205,522 4,989,185 (350,000) 261,381 0.10 0.10 0.13 10,372,608 5,383,453 4,989,155 257,500 399,374 0.16 0.16 0.13 8,890,641 4,475,826 4,414,815 56,000 1,675,397 0.67 0.67 0.13 $ $ $ $ $ $ 10,314,706 5,190,253 5,124,453 - 2,482,863 1.00 0.98 0.13 10,812,675 5,697,041 5,115,634 4,956,000 (2,311,994) (0.94) (0.94) 0.13 9,043,212 4,523,366 4,519,846 167,500 836,609 0.34 0.34 0.13 9,891,689 5,089,540 4,802,149 (145,000) 661,298 0.27 0.26 0.13 10,123,334 5,675,625 4,447,709 91,500 546,427 0.22 0.22 0.13 9,192,696 4,826,084 4,366,612 164,000 498,102 0.20 0.20 0.13 32 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21. FAIR VALUES OF FINANCIAL INSTRUMENTS The following table discloses the Company’s estimated fair value amounts of its financial instruments. It is management’s belief that the fair values presented below are reason- able based on the valuation techniques and data available to the Company as of September 30, 2006 and 2005, as more fully described below. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be sub- stantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the sub- sidiary banks’ capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values below. The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at September 30, 2006 and 2005. The information presented is subject to change over time based on a variety of factors. Dollars in thousands Financial assets Cash and cash equivalents Securities purchased under agreements to resell Securities available for sale Loans receivable, net Loans held for sale FHLB and FRB stock Accrued interest receivable Financial liabilities Noninterest bearing demand deposits Interest bearing demand deposits, savings, and money markets Certificates of deposit Total deposits Advances from FHLB Securities sold under agreements to repurchase Subordinated debentures Accrued interest payable $ 2005 $ 2006 $ Carrying Amount 109,353 5,891 186,176 388,762 508 5,768 4,379 189,506 159,988 216,217 565,711 99,565 15,179 9,831 972 $ Estimated Fair Value 109,353 5,891 186,176 386,078 514 5,768 4,379 189,506 159,988 214,786 564,280 101,189 15,064 10,035 972 Carrying Amount 14,370 37,513 230,893 440,190 306 8,287 4,241 102,435 170,484 268,122 541,041 159,705 20,507 9,800 942 Off-balance-sheet instruments, loan commitments - - - Estimated Fair Value 14,370 37,513 230,893 434,521 306 8,287 4,241 102,435 170,484 265,828 538,747 160,675 20,340 10,336 942 - 33 Meta Financial Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at September 30, 2006 and 2005. 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. CASH AND CASH EQUIVALENTS The carrying amount of cash and short-term investments is assumed to approximate the fair value. SECURITIES PURCHASED UNDER AGREEMENT TO RESELL The carrying amount of securities purchased under agreement to resell is assumed to approximate the fair value. SECURITIES AVAILABLE FOR SALE To the extend available, quoted market prices or dealer quotes were used to determine the fair value of securities available for sale. For those securities which are thinly traded, or for which market data was not available, management estimated prices using other available data. The amount of securities for which prices were not available is not mate- rial to the portfolio as a whole. LOANS RECEIVABLE, NET The fair value of loans was estimated by discounting the future cash flows using the cur- rent rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and condi- tions and discounted at a target rate at which similar loans would be made to borrowers as of September 30, 2006 and 2005. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit quality. LOANS HELD FOR SALE Fair values are based on quoted market prices of similar loans sold on the sec- ondary market. FHLB AND FEDERAL RESERVE STOCK The fair value of such stock approximates book value since the Company is able to redeem this stock at par value. ACCRUED INTEREST RECEIVABLE The carrying amount of accrued interest receivable is assumed to approximate the fair value. DEPOSITS The carrying values of non-interest bearing checking deposits, interest bearing checking deposits, savings, and money markets is assumed to approximate fair value, since such deposits are immediately withdrawable without penalty. The fair value of time certificates of deposit was estimated by discounting expected future cash flows by the current rates offered as of September 30, 2006 and 2005 on certificates of deposit with similar remaining maturities. ADVANCES FROM FHLB The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates as of September 30, 2006 and 2005 for advances with similar terms and remaining maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market as of September 30, 2006 and 2005 over the contractual maturity of such borrowings. ACCRUED INTEREST PAYABLE The carrying amount of accrued interest payable is assumed to approximate the fair value. LOAN COMMITMENTS The commitments to originate and purchase loans have terms that are consistent with current market terms. Accordingly, the Company estimates that the fair values of these commitments are not significant. LIMITATIONS It must be noted that fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. Additionally, fair value esti- mates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experi- ence, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis. 34 BOARD OF DIRECTORS James S. Haahr Brad C. Hanson Chairman of the Board for Meta Financial Group, MetaBank, and Executive Vice President for Meta Financial Group and MetaBank and MetaBank West Central E. Wayne Cooley President of Meta Payment Systems Division Frederick V. Moore Consultant Emeritus of the Iowa Girls’ High School Athletic Union President of Buena Vista University 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 Ron Butterfield Chairman of the Board for Meta Financial Group, MetaBank, and Senior Vice President of Meta Payment Systems Division 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 Division Jonathan M. Gaiser, CFA Senior Vice President, Secretary, Treasurer and Chief Financial Officer for Meta Financial Group and MetaBank, and Secretary for MetaBank West Central Ellen E. Moore Vice President of Marketing and Sales for Meta Financial Group and Senior Vice President of Marketing and Sales for MetaBank and MetaBank West Central Brian R. Bond Senior Vice President and Chief Lending Officer Raymond J. Frohnapfel Senior Vice President and Chief Information Officer Sandra K. Hegland Senior Vice President of Human Resources Ben Guenther President of MetaBank Northwest Iowa Market Tim D. Harvey President of MetaBank Brookings 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 Kathy M. Thorson President of MetaBank Sioux Empire Market Lisa J. Binder Vice President of Marketing and Sales John Hagy Vice President, Chief Risk Officer and General Counsel Barb Koopman Vice President of 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; to January 22, 2007. The meeting will be held in the Board Room of MetaBank, report lost certificates; or to consolidate accounts, should contact the corpora- 121 East Fifth Street, Storm Lake, Iowa. Further information with regard to this tion’s transfer agent: 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 Web site: www.rtco.com Form 10-K Copies of the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 (excluding exhibits thereto) may be obtained without charge by contacting: Investor Relations Meta Financial Group MetaBank Building 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 Telephone: 712.732.4117 Email: invrelations@metacash.com Web site: www.metacash.com DIVIDEND AND STOCK MARKET INFORMATION Meta Financial Group’s common stock trades on the NASDAQ Global MarketSM National Market Listing. Quarterly dividends for 2005 and 2006 were $0.13. under the symbol “CASH.” The Wall Street Journal publishes daily trading The price range of the common stock, as reported on the Nasdaq System, information for the stock under the abbreviation, “MetaFnl,” in the was as follows: FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FISCAL YEAR 2006 FISCAL YEAR 2005 LOW HIGH LOW HIGH $ 18.55 19.04 21.01 22.32 $ 23.00 28.10 23.18 25.73 $ 22.50 22.25 18.15 16.51 $ 26.00 24.49 24.09 19.89 Prices disclose inter-dealer quotations without retail mark-up, mark-down or who hold their stock in nominee or “street” name. commissions, and do not necessarily represent actual transactions. The following securities firms indicated they were acting as market Dividend payment decisions are made with consideration of a variety of makers for Meta Financial Group stock as of September 30, 2006: Archipelago factors including earnings, financial condition, market considerations, and regula- Stock Exchange; Automated Trading Desk; B-Trade Services LLC; Boston tory restrictions. Restrictions on dividend payments are described in Note 15 of Stock Exchange; Citadel Derivatives Group LLC; Citigroup Global Markets Inc.; the Notes to Consolidated Financial Statements included in this Annual Report. E*Trade Capital Markets LLC; Friedman, Billings, Ramsey & Co., Inc.; FTN As of September 30, 2006, Meta Financial Group had 2,526,034 shares Financial Securities Corp; FTN Midwest Research Securities Corp.; Hill, of common stock outstanding, which were held by 237 shareholders of Thompson, Magid and Co.; Howe Barnes Investments; Knight Equity Markets, record, and 386,425 shares subject to outstanding options. The shareholders L.P.; Nasdaq Execution Services LLC; National Stock Exchange; Sandler of record number does not reflect approximately 500 persons or entities O’Neill & Partners; and UBS Securities LLC. 3 6 METABANK METABANK METABANK METABANK NORTHWEST IOWA MARKET BROOKINGS MARKET SIOUX EMPIRE MARKET 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 STORM LAKE MAIN OFFICE 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 712.732.4117 800.792.6815 712.732.8122 fax Storm Lake Plaza 1413 North Lake Avenue P.O. Box 1307 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 SIOUX FALLS MAIN OFFICE 4900 South Western Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.338.0059 605.338.0155 fax North Minnesota 1600 North Minnesota Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.338.3470 605.338.3471 fax South Minnesota 2500 South Minnesota Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.977.7500 605.977.7501 fax West 12th Street 2104 West 12th Street P.O. Box 520 Sioux Falls, South Dakota 57101 605.336.8900 605.336.8901 fax MPS and Administrative Office 101 West 69th Street, Suite 104 P.O. Box 520 Sioux Falls, South Dakota 57101 605.338.0774 605.338.0596 fax 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 Jordan Creek 270 South 68th Street West Des Moines, Iowa 50266 515.223.0440 515.223.0439 fax West Des Moines 3448 Westown Parkway West Des Moines, Iowa 50266 515.226.8474 515.226.8475 fax SOUTH DAKOTA IOWA META PAYMENT SYSTEMS 4900 South Western Avenue P.O. Box 520 Sioux Falls, South Dakota 57101 605.275.9555 800.550.6382 605.782.1701 fax metapay.com META TRUST 4900 South Western Avenue Sioux Falls, South Dakota 57101 605.782.1780 605.338.0155 fax metabankonline.com 3 7 BrookingsSioux FallsLaurensStorm LakeOdeboltSac CityLake ViewMenloCaseyStuartUrbandaleDes MoinesWest Des MoinesInvest in us. Bank with us. Enjoy the journey. for every life change MetaBank Building 121 East Fifth Street P.O. Box 1307 Storm Lake, Iowa 50588 metacash.com 

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