Pathward Financial, Inc. Annual Report 2006

FY2006 Annual Report · Pathward Financial, Inc.

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2006 ANNUAL REPORT

for every
life change

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

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

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%0602030405FINANCIAL 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

$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

Meta Financial Group, Inc. and Subsidiaries

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

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

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

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.

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

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)

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

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.

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

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

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

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

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

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

-
-

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.

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.

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.

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.

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.

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.

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.

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

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.

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)

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

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

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.

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.

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.

-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

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

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

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.

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

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

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.

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

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 MoinesInvest 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