UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number:  0-22140

META FINANCIAL GROUP, INC. ®
(Exact name of registrant as specified in its charter)

Delaware
 
42-1406262
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices)

(605) 782-1767
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO☐

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ YES  ☒ NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class:
Outstanding at May 2, 2016:
Common Stock, $.01 par value
8,504,034 Common Shares
Nonvoting Common Stock, $.01 par value
0 Common Shares
 


META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents

2
     
Item 1.
2
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
38
     
Item 3.
52
     
Item 4.
58
   
60
     
Item 1.
60
     
Item 1A.  
60
     
Item 2.
62
     
Item 3.
62
     
Item 4.
62
     
Item 5.
62
     
Item 6.
62
   
63
 
i

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements.

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)


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

See Notes to Condensed Consolidated Financial Statements.
 
2

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)

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

See Notes to Condensed Consolidated Financial Statements.
 
3

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in Thousands)

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

See Notes to Condensed Consolidated Financial Statements.
 
4

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended March 31, 2016 and 2015
(Dollars in Thousands, Except Share and Per Share Data)

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

See Notes to Condensed Consolidated Financial Statements.
 
5

META FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)

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

See Notes to Condensed Consolidated Financial Statements.
 
6

NOTE 1. BASIS OF PRESENTATION

The interim unaudited Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2015 included in Meta Financial Group, Inc.’s (“Meta Financial” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 14, 2015.  Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the six month period ended March 31, 2016, are not necessarily indicative of the results expected for the year ending September 30, 2016.


NOTE 2. CREDIT DISCLOSURES

The allowance for loan losses represents management’s estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements.  The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries).  Estimating the risk of loss and the amount of loss on any loan is necessarily subjective.  Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.  While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.

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

The allowance consists of specific, general, and unallocated components.  The specific component relates to impaired loans.  For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers loans not considered impaired and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Smaller-balance homogenous loans are collectively evaluated for impairment.  Such loans include premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, manufactured homes, home equity and second mortgage loans, and tax product loans.  Commercial and agricultural loans and mortgage loans secured by other properties are evaluated individually for impairment.  When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment.  Often this is associated with a delay or shortfall in payments of 210 days or more for premium finance loans and 90 days or more for other loan categories.  Non-accrual loans and all troubled debt restructurings are considered impaired.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.
 
7

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

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

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

   
1-4 Family
Real Estate
   
Commercial and
Multi-Family
Real Estate
   
Agricultural
Real Estate
   
Consumer
   
Commercial
Operating
   
Agricultural
Operating
   
Premium
Finance
   
Unallocated
   
Total
 
   
(Dollars in Thousands)
 
Three Months Ended March 31, 2016
                                                     
                                                       
Allowance for loan losses:
                                                     
Beginning balance
 
$
285
   
$
1,194
   
$
171
   
$
20
   
$
107
   
$
3,856
   
$
424
   
$
609
   
$
6,666
 
Provision (recovery) for loan losses
   
42
     
790
     
(17
)
   
1,039
     
(62
)
   
(529
)
   
171
     
(261
)
   
1,173
 
Charge offs
   
-
     
(290
)
   
-
     
-
     
-
     
-
     
(137
)
   
-
     
(427
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
     
19
     
-
     
19
 
Ending balance
 
$
327
   
$
1,694
   
$
154
   
$
1,059
   
$
45
   
$
3,327
   
$
477
   
$
348
   
$
7,431
 
                                                                         
Six Months Ended March 31, 2016
                                                                       
                                                                         
Allowance for loan losses:
                                                                       
Beginning balance
 
$
278
   
$
1,187
   
$
163
   
$
20
   
$
28
   
$
3,537
   
$
293
   
$
749
   
$
6,255
 
Provision (recovery) for loan losses
   
49
     
797
     
(9
)
   
1,039
     
17
     
(210
)
   
677
     
(401
)
   
1,959
 
Charge offs
   
-
     
(290
)
   
-
     
-
     
-
     
-
     
(527
)
   
-
     
(817
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
     
34
     
-
     
34
 
Ending balance
 
$
327
   
$
1,694
   
$
154
   
$
1,059
   
$
45
   
$
3,327
   
$
477
   
$
348
   
$
7,431
 
                                                                         
Ending balance: individually evaluated for impairment
   
-
     
40
     
-
     
-
     
-
     
2,846
     
-
     
-
     
2,886
 
Ending balance: collectively evaluated for impairment
   
327
     
1,654
     
154
     
1,059
     
45
     
481
     
477
     
348
     
4,545
 
Total
 
$
327
   
$
1,694
   
$
154
   
$
1,059
   
$
45
   
$
3,327
   
$
477
   
$
348
   
$
7,431
 
                                                                         
Loans:
                                                                       
Ending balance: individually evaluated for impairment
   
114
     
1,091
     
-
     
-
     
6
     
3,421
     
-
     
-
     
4,632
 
Ending balance: collectively evaluated for impairment
   
139,886
     
353,703
     
64,111
     
35,937
     
26,903
     
38,660
     
121,572
     
-
     
780,772
 
Total
 
$
140,000
   
$
354,794
   
$
64,111
   
$
35,937
   
$
26,909
   
$
42,081
   
$
121,572
   
$
-
   
$
785,404
 
 
8

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

Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by our regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.”  The loan classification and risk rating definitions are as follows:

Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

Watch- A watch asset is generally credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures.  Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention.  These assets are of better quality than special mention assets.

Special Mention- Special mention assets are credits with potential weaknesses deserving management’s close attention and if left uncorrected, may result in deterioration of the repayment prospects for the asset.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.

The adverse classifications are as follows:

Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position.  Assets so classified have well-defined weaknesses creating a distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected.  Loss potential does not have to exist for an asset to be classified as substandard.
 
9

Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort.  Due to pending factors the asset’s classification as loss is not yet appropriate.

Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is no longer warranted.  This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
 
The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans to an individual, a specific industry, a geographic location, or an occupation.  Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Bank’s Tier 1 Capital plus the Allowance for Loan Losses.
 
The asset classification of loans at March 31, 2016 and September 30, 2015 are as follows:

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

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

One-to-Four Family Residential Mortgage Lending.  One-to-four family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate and adjustable rate mortgage (“ARM”) loans for both permanent structures and those under construction.  The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
 
10

The Company originates one-to-four family residential mortgage loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan‑to‑value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.

Due to consumer demand, the Company offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market, i.e., Fannie Mae, Ginnie Mae, and Freddie Mac standards.  The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales.  Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.

The Company also currently offers five- and ten-year ARM loans.  These loans have a fixed-rate for the stated period and, thereafter, adjust annually.  These loans generally provide for an annual cap of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate.  As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as the Company’s cost of funds.  The Company’s ARMs do not permit negative amortization of principal and are not convertible into fixed-rate loans.  The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed-rate residential loans.  The current low mortgage interest rate environment makes ARM loans relatively unattractive and very few are currently being originated.

In underwriting one-to-four family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.

Commercial and Multi-Family Real Estate Lending.  The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan and participation interests in loans from other financial institutions.  The purchased loans and loan participation interests are generally secured by properties primarily located in the Midwest and the West.

The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by guarantees of the borrowers.  The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio.  Commercial and multi-family real estate loans provide for a margin over a number of different indices.  In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.  Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
 
11

Agricultural Lending.  The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm-related products.  Agricultural operating loans are originated at either an adjustable or fixed-rate of interest for up to a one year term or, in the case of livestock, upon sale.  Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year.  Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.

Agricultural real estate loans are frequently originated with adjustable rates of interest.  Generally, such loans provide for a fixed rate of interest for the first five to ten years, which then balloon or adjust annually thereafter.  In addition, such loans generally amortize over a period of 20 to 25 years.  Fixed-rate agricultural real estate loans generally have terms up to ten years.  Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.

Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one-to-four family residential lending, but involves a greater degree of risk than one-to-four family residential mortgage loans because of the typically larger loan amount.  In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.  The success of the loan may also be affected by many factors outside the control of the borrower.

Weather presents one of the greatest risks as hail, drought, floods, or other conditions can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral.  This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment.  Government support programs and the Company generally require that farmers procure crop insurance coverage.  Grain and livestock prices also present a risk as prices may decline prior to sale, resulting in a failure to cover production costs.  These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk.  The Company frequently requires borrowers to use futures contracts or options to reduce price risk and help ensure loan repayment.  Another risk is the uncertainty of government programs and other regulations.  During periods of low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result.  Finally, many farms are dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.

Consumer Lending – Retail Bank.  The Company, through the auspices of its “Retail Bank”, originates a variety of secured consumer loans, including home equity, home improvement, automobile, boat and loans secured by savings deposits.  In addition, the Retail Bank offers other secured and unsecured consumer loans.  The Retail Bank currently originates most of its consumer loans in its primary market area and surrounding areas.

The largest component of the Retail Bank’s consumer loan portfolio consists of home equity loans and lines of credit.  Substantially all of the Retail Bank’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Retail Bank will lend amounts which, together with all prior liens, may be up to 90% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.

The Retail Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Retail Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers.  The Bank’s automobile loans typically are originated at fixed interest rates with terms up to 60 months for new and used vehicles.  Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.
 
12

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison of the value of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Consumer Lending- Meta Payment Systems (“MPS”).  The Company believes that well-managed, nationwide credit programs can help meet legitimate credit needs for prime and sub-prime borrowers, and affords the Company an opportunity to diversify the loan portfolio and minimize earnings exposure due to economic downturns.  Therefore, MPS designs and administers certain credit programs that seek to accomplish these objectives.  The MPS Credit Committee, consisting of members of Executive Management of the Company, is charged with monitoring, evaluating and reporting portfolio performance and the overall credit risk posed by its credit products. All proposed credit programs must first be reviewed and approved by the committee before such programs are presented to the Bank’s Board of Directors for approval.  The Board of Directors of the Bank is ultimately responsible for final approval of any credit program.

MPS strives to offer consumers innovative payment products, including credit products.  Most credit products have fallen into the category of portfolio lending.  MPS continues to work on new alternative portfolio lending products striving to serve its core customer base and to provide unique and innovative lending solutions to the unbanked and under-banked segment.

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

A Portfolio Credit Policy which has been approved by the Board of Directors governs portfolio credit initiatives undertaken by MPS, whereby the Company retains some or all receivables and relies on the borrower as the underlying source of repayment.  Several portfolio lending programs also have a contractual provision that requires the Bank to be indemnified for credit losses that meet or exceed predetermined levels.  Such a program carries additional risks not commonly found in sponsorship programs, specifically funding and credit risk.  Therefore, MPS has strived to employ policies, procedures and information systems that it believes commensurate with the added risk and exposure.

Commercial Operating Lending.  The Company also originates commercial operating loans.  Most of the Company’s commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable, and operating costs for the Company’s network of tax Electronic Return Originators (“EROs”).  Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.

The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan.  ERO loans are not collateralized.  The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than more traditional lending activities.
 
13

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment).  The Company’s commercial operating loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

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

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

Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-180 days to convert the collateral into cash.  In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy and establish a first position lien on the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should typically be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium.  Generally, when a premium finance loan becomes delinquent for 210 days or more, or when collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status until the loan becomes current and has demonstrated a sustained period of satisfactory performance.
 
14

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

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

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

When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment.  Often this is associated with a delay or shortfall in payments of 210 days or more for premium finance loans and 90 days or more for other loan categories.  As of March 31, 2016, there were no Premium Finance loans greater than 210 days past due.

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

   
Recorded
Balance
   
Unpaid Principal
Balance
   
Specific
Allowance
 
March 31, 2016
 
(Dollars in Thousands)
 
                   
Loans without a specific valuation allowance
                 
1-4 Family Real Estate
 
$
114
   
$
114
   
$
-
 
Commercial and Multi-Family Real Estate
   
439
     
439
     
-
 
Commercial Operating
   
6
     
6
     
-
 
Total
 
$
559
   
$
559
   
$
-
 
Loans with a specific valuation allowance
                       
Commercial and Multi-Family Real Estate
 
$
652
   
$
942
   
$
40
 
Agricultural Operating
   
3,421
     
3,571
     
2,846
 
Total
 
$
4,073
   
$
4,513
   
$
2,886
 
 
15

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

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

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

The Company’s troubled debt restructurings (“TDR”) typically involve forgiving a portion of interest or principal on existing loans or making loans at a rate materially less than current market rates. There were no loans modified in a TDR during the three and six month periods ended March 31, 2016 and 2015.  Additionally, there were no TDR loans for which there was a payment default during the three and six month periods ended March 31, 2016 and 2015 that had been modified during the 12-month period prior to the default.

NOTE 3.
ALLOWANCE FOR LOAN LOSSES

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

The allowance for loan losses is established through the provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitore