Annual Statements Open main menu
  1. Annual Statements
  2. » Companies
  3. » PATHWARD FINANCIAL, INC.
  4. » Quarter Report: 2019 June (Form 10-Q)

PATHWARD FINANCIAL, INC. - Quarter Report: 2019 June (Form 10-Q)

 
 
 
 
 
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 June 30, 2019

☐  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

metalogoa18.jpg
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 and Zip Code)

(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, smaller reporting company or an emerging growth company See the definitions of "large accelerated filer." "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller Reporting Company
☐
Emerging growth company
☐
 
 
 
 
 
 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
CASH
The NASDAQ Stock Market LLC

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 August 2, 2019:
Common Stock, $.01 par value
37,879,833

Shares
Nonvoting Common Stock, $.01 par value
0

Nonvoting shares
 
 
 
 
 


META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.  
 
 
 
Item 2.
 
 
 
Item 6.
 
 

i

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Share Data(1))
(Unaudited)
 
 
ASSETS
June 30, 2019
 
September 30, 2018
Cash and cash equivalents
$
100,732

 
$
99,977

Investment securities available for sale, at fair value
961,897

 
1,484,160

Mortgage-backed securities available for sale, at fair value
395,201

 
364,065

Investment securities held to maturity, at cost
138,128

 
163,893

Mortgage-backed securities held to maturity, at cost
7,414

 
7,850

Loans held for sale
62,839

 
15,606

Loans and leases
3,631,031

 
2,944,739

Allowance for loan and lease losses
(43,505
)
 
(13,040
)
Federal Home Loan Bank Stock, at cost
17,236

 
23,400

Accrued interest receivable
19,722

 
22,016

Premises, furniture, and equipment, net
46,360

 
40,458

Rental equipment, net
184,732

 
107,290

Bank-owned life insurance
89,193

 
87,293

Foreclosed real estate and repossessed assets
29,514

 
31,638

Goodwill
307,941

 
303,270

Intangible assets
56,153

 
70,719

Prepaid assets
22,023

 
27,906

Deferred taxes
21,630

 
18,737

Other assets
52,831

 
35,090

 


 
 
Total assets
$
6,101,072

 
$
5,835,067

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
 
 
 
 
LIABILITIES
 

 
 
Noninterest-bearing checking
$
2,751,931

 
$
2,405,274

Interest-bearing checking
157,802

 
111,587

Savings deposits
52,179

 
54,765

Money market deposits
68,604

 
51,995

Time certificates of deposit
116,698

 
276,180

Wholesale deposits
1,628,000

 
1,531,186

Total deposits
4,775,214

 
4,430,987

Short-term borrowings
146,613

 
425,759

Long-term borrowings
209,765

 
88,963

Accrued interest payable
12,350

 
7,794

Accrued expenses and other liabilities
134,229

 
133,838

Total liabilities
5,278,171

 
5,087,341

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2019 and September 30, 2018, respectively
—

 
—

Common stock, $.01 par value; 90,000,000 and 90,000,000 shares authorized, 37,878,694 and 39,192,063 shares issued, 37,878,205 and 39,167,280 shares outstanding at June 30, 2019 and September 30, 2018, respectively
379

 
393

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at June 30, 2019 and September 30, 2018, respectively
—

 
—

Additional paid-in capital
578,715

 
565,811

Retained earnings
238,004

 
213,048

Accumulated other comprehensive income (loss)
2,308

 
(33,111
)
Treasury stock, at cost, 489 and 24,783 common shares at June 30, 2019 and September 30, 2018, respectively
(13
)
 
(1,989
)
Total equity attributable to parent
819,393

 
744,152

Noncontrolling interest
3,508

 
3,574

Total stockholders’ equity
822,901

 
747,726

 
 
 
 
Total liabilities and stockholders’ equity
$
6,101,072

 
$
5,835,067

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.

2
Table of Contents


META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data(1))
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Interest and dividend income:
 
 
 
 
 
 
 
Loans and leases, including fees
$
69,732

 
$
19,056

 
$
203,900

 
$
53,344

Mortgage-backed securities
3,063

 
3,950

 
8,622

 
11,755

Other investments
8,837

 
11,098

 
32,380

 
33,234

 
81,632

 
34,104

 
244,902

 
98,333

Interest expense:
 

 
 

 
 

 
 

Deposits
10,395

 
2,264

 
35,731

 
7,106

FHLB advances and other borrowings
4,269

 
3,429

 
10,581

 
9,215

 
14,664

 
5,693

 
46,312

 
16,321

 
 
 
 
 
 
 
 
Net interest income
66,968

 
28,411

 
198,590

 
82,012

 
 
 
 
 
 
 
 
Provision for loan and lease losses
9,112

 
5,315

 
51,529

 
24,726

 
 
 
 
 
 
 
 
Net interest income after provision for loan and lease losses
57,856

 
23,096

 
147,061

 
57,286

 
 
 
 
 
 
 
 
Noninterest income:
 

 
 

 
 

 
 

Refund transfer product fees
6,697

 
7,358

 
38,559

 
41,353

Tax advance product fees
34

 
(46
)
 
34,757

 
35,739

Card fees
19,537

 
22,807

 
61,939

 
74,910

Rental income
9,386

 
—

 
30,167

 
—

Loan and lease fees
1,012

 
1,111

 
3,185

 
3,445

Bank-owned life insurance
628

 
633

 
1,901

 
1,952

Deposit fees
2,335

 
1,134

 
6,365

 
2,964

Gain (loss) on sale of securities available-for-sale, net (Includes $440 and ($22) reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended June 30, 2019 and 2018, respectively and $649 and ($1,198) for the nine months ended June 30, 2019 and 2018, respectively)
440

 
(22
)
 
649

 
(1,198
)
Gain on sale of loans and leases
1,913

 
—

 
3,865

 
—

Loss on foreclosed real estate
—

 
—

 
(185
)
 
(19
)
Other income
1,808

 
250

 
5,363

 
766

Total noninterest income
43,790

 
33,225

 
186,565

 
159,912

 
 
 
 
 
 
 
 
Noninterest expense:
 

 
 

 
 

 
 

Compensation and benefits
35,176

 
24,439

 
117,350

 
78,951

Refund transfer product expense
287

 
1,694

 
7,478

 
11,665

Tax advance product expense
425

 
(19
)
 
3,101

 
1,736

Card processing
4,613

 
7,068

 
18,670

 
20,798

Occupancy and equipment
7,136

 
4,720

 
20,806

 
14,087

Operating lease equipment depreciation
6,029

 
—

 
18,280

 
—

Legal and consulting
4,065

 
2,781

 
12,341

 
8,436

Marketing
368

 
416

 
1,493

 
1,637

Data processing
260

 
301

 
1,018

 
958

Intangible amortization
4,374

 
1,664

 
14,352

 
6,077

Impairment expense
—

 
—

 
9,660

 
—

Other expense
9,735

 
5,988

 
32,467

 
17,247

Total noninterest expense
72,468

 
49,053

 
257,016

 
161,592

 
 
 
 
 
 
 
 
Income before income tax expense
29,178

 
7,268

 
76,610

 
55,606

 
 
 
 
 
 
 
 
Income tax (benefit) expense (Includes $110 and ($6) reclassified from accumulated other comprehensive loss for the three months ended June 30, 2019 and 2018, respectively and $162 and ($335) for the nine months ended June 30, 2019 and 2018, respectively)
(1,158
)
 
476

 
(3,244
)
 
12,708

 
 
 
 
 
 
 
 
Net income before noncontrolling interest
30,336

 
6,792

 
79,854

 
42,898

Net income attributable to noncontrolling interest
1,045

 
—

 
3,045

 
—

Net income attributable to parent
$
29,291

 
$
6,792

 
$
76,809

 
$
42,898

 
 
 
 
 
 
 
 
Earnings per common share
 

 
 

 
 

 
 

Basic
$
0.75

 
$
0.23

 
$
1.96

 
$
1.48

Diluted
$
0.75

 
$
0.23

 
$
1.95

 
$
1.47

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.


3
Table of Contents

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income before noncontrolling interest
$
30,336

 
$
6,792

 
$
79,854

 
$
42,898

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 

 
 

Change in net unrealized gain (loss) on debt securities
16,897

 
(9,905
)
 
48,157

 
(53,377
)
(Gain) loss realized in net income
(440
)
 
22

 
(649
)
 
1,198

 
16,457

 
(9,883
)
 
47,508

 
(52,179
)
Unrealized gain (loss) on currency translation
221

 
—

 
(24
)
 
—

Deferred income tax effect
4,106

 
(2,447
)
 
11,590

 
(14,412
)
Total other comprehensive income (loss)
12,572

 
(7,436
)
 
35,894

 
(37,767
)
Total comprehensive income (loss)
42,908

 
(644
)
 
115,748

 
5,131

Total comprehensive income attributable to noncontrolling interest
1,045

 
—

 
3,045

 
—

Comprehensive income (loss) attributable to parent
$
41,863

 
$
(644
)
 
$
112,703

 
$
5,131

See Notes to Condensed Consolidated Financial Statements.


4
Table of Contents

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data(1))
 
Meta Financial Group, Inc. Stockholders' Equity
 
 
 
 
Three Months Ended June 30, 2019
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Noncontrolling Interest
 
Total Equity
Balance, March 31, 2019
$
395

 
$
576,406

 
$
258,600

 
$
(10,264
)
 
$
(4,956
)
 
$
820,181

 
$
3,528

 
$
823,709

Cash dividends declared on common stock ($0.05 per share)
—

 
—

 
(1,931
)
 
—

 
—

 
(1,931
)
 
—

 
(1,931
)
Issuance of common shares due to exercise of stock options
—

 
37

 
—

 
—

 
—

 
37

 
—

 
37

Share repurchases
(16
)
 
16

 
(43,000
)
 
—

 
(13
)
 
(43,013
)
 
—

 
(43,013
)
Retirement of treasury stock
—

 
—

 
(4,956
)
 
—

 
4,956

 
—

 
 
 
—

Stock compensation
—

 
2,256

 
—

 
—

 
—

 
2,256

 
—

 
2,256

Total other comprehensive income
—

 
—

 
—

 
12,572

 
—

 
12,572

 
—

 
12,572

Net income
—

 
—

 
29,291

 
—

 
—

 
29,291

 
1,045

 
30,336

Net investment by (distribution to) noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(1,065
)
 
(1,065
)
Balance, June 30, 2019
$
379

 
$
578,715

 
$
238,004

 
$
2,308

 
$
(13
)
 
$
819,393

 
$
3,508

 
$
822,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
$
393

 
$
565,811

 
$
213,048

 
$
(33,111
)
 
$
(1,989
)
 
$
744,152

 
$
3,574

 
$
747,726

Adoption of Accounting Standards Update 2014-09, net of income taxes
—

 
—

 
1,502

 
—

 
—

 
1,502

 
—

 
1,502

Adoption of Accounting Standards Update 2016-01
—

 
—

 
475

 
(475
)
 
—

 
—

 
—

 
—

Cash dividends declared on common stock ($0.15 per share)
—

 
—

 
(5,874
)
 
—

 
—

 
(5,874
)
 
—

 
(5,874
)
Issuance of common shares due to exercise of stock options
—

 
92

 
—

 
—

 
—

 
92

 
—

 
92

Issuance of common shares due to restricted stock
3

 
—

 
—

 
—

 
—

 
3

 
—

 
3

Issuance of common shares due to ESOP
—

 
2,010

 
—

 
—

 
—

 
2,010

 
—

 
2,010

Share repurchases
(17
)
 
17

 
(43,000
)
 
—

 
(2,980
)
 
(45,980
)
 
—

 
(45,980
)
Retirement of treasury stock
—

 
—

 
(4,956
)
 
—

 
4,956

 
—

 
—

 
—

Stock compensation
—

 
10,785

 
—

 
—

 
—

 
10,785

 
—

 
10,785

Total other comprehensive income
—

 
—

 
—

 
35,894

 
—

 
35,894

 
—

 
35,894

Net income
—

 
—

 
76,809

 
—

 
—

 
76,809

 
3,045

 
79,854

Net investment by (distribution to) noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(3,111
)
 
(3,111
)
Balance, June 30, 2019
$
379

 
$
578,715

 
$
238,004

 
$
2,308

 
$
(13
)
 
$
819,393

 
$
3,508

 
$
822,901



5
Table of Contents

 
Meta Financial Group, Inc. Stockholders' Equity
 
 
 
 
Three Months Ended June 30, 2018
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Noncontrolling Interest
 
Total Equity
Balance, March 31, 2018
$
291

 
$
265,491

 
$
200,753

 
$
(21,166
)
 
$
(1,666
)
 
$
443,703

 
$
—

 
$
443,703

Cash dividends declared on common stock ($0.04 per share)
—

 
—

 
(1,261
)
 
—

 
—

 
(1,261
)
 
—

 
(1,261
)
Shares repurchased
—

 
—

 
—

 
—

 
(5
)
 
(5
)
 
—

 
(5
)
Stock compensation
—

 
2,119

 
—

 
—

 
—

 
2,119

 
—

 
2,119

Total other comprehensive (loss)
—

 
—

 
—

 
(7,435
)
 
—

 
(7,435
)
 
—

 
(7,435
)
Net income
—

 
—

 
6,792

 
—

 
—

 
6,792

 
—

 
6,792

Balance, June 30, 2018
$
291

 
$
267,610

 
$
206,284

 
$
(28,601
)
 
$
(1,671
)
 
$
443,913

 
$
—

 
$
443,913

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
$
288

 
$
258,144

 
$
167,164

 
$
9,166

 
$
(266
)
 
$
434,496

 
$
—

 
$
434,496

Cash dividends declared on common stock ($0.12 per share)
—

 
—

 
(3,778
)
 
—

 
—

 
(3,778
)
 
—

 
(3,778
)
Issuance of common shares due to exercise of stock options
—

 
147

 
—

 
—

 
—

 
147

 
—

 
147

Issuance of common shares due to restricted stock
2

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Issuance of common shares due to ESOP
1

 
1,605

 
—

 
—

 
—

 
1,606

 
—

 
1,606

Shares repurchased
—

 
(726
)
 
—

 
—

 
(1,405
)
 
(2,131
)
 
—

 
(2,131
)
Stock compensation
—

 
8,440

 
—

 
—

 
—

 
8,440

 
—

 
8,440

Total other comprehensive (loss)
—

 
—

 
—

 
(37,767
)
 
—

 
(37,767
)
 
—

 
(37,767
)
Net income
—

 
—

 
42,898

 
—

 
—

 
42,898

 
—

 
42,898

Balance, June 30, 2018
$
291

 
$
267,610

 
$
206,284

 
$
(28,601
)
 
$
(1,671
)
 
$
443,913

 
$
—

 
$
443,913

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.


6
Table of Contents


META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended June 30,
(Dollars in Thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
79,854

 
$
42,898

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion, net
41,290

 
27,995

Stock compensation
10,785

 
8,440

Provision (recovery):
 
 
 
Loan and lease losses
51,529

 
24,726

Deferred taxes
(14,468
)
 
488

Loans held for sale:
 
 
 
Originations
(104,121
)
 
—

Purchases
(12,643
)
 
—

Proceeds from sales
95,663

 
—

Net change
15,925

 
—

Fair value adjustment of foreclosed real estate
139

 
29

Net realized (gain) loss:
 
 
 
Other assets
(54
)
 
(1
)
Foreclosed real estate or other assets
185

 
19

Available for sale securities, net
(649
)
 
1,198

Loans held for sale
(3,650
)
 
—

Leases receivable and rental equipment
(2,598
)
 
—

Net change:
 
 
 
Other assets
(15,957
)
 
577

Accrued interest payable
4,556

 
1,425

Accrued expenses and other liabilities
18,785

 
4,879

Accrued interest receivable
2,294

 
1,555

Change in bank-owned life insurance value
(1,900
)
 
(1,952
)
Impairment on rental equipment
6,194

 
—

Impairment of intangibles
111

 
—

Net cash provided by operating activities
171,270

 
112,276

 
 
 
 
Cash flows from investing activities:
 

 
 

Available for sale securities:
 
 
 
Purchases
(297,548
)
 
(418,699
)
Proceeds from sales
720,376

 
312,863

Proceeds from maturities and principal repayments
110,810

 
115,878

Held to maturity:
 
 
 
Proceeds from maturities and principal repayments
24,809

 
29,752

Loans and leases:
 
 
 
Purchases
(219,551
)
 
(95,169
)
Proceeds from sales
13,069

 
19,961

Net change
(530,215
)
 
(238,679
)
Proceeds from sales of foreclosed real estate or other assets
1,905

 
244

Federal Home Loan Bank stock:
 
 
 
Purchases
(606,756
)
 
(713,444
)
Redemption
612,920

 
767,120

Rental equipment:
 
 
 
Purchases
(111,150
)
 
—

Proceeds from sales
6,551

 
—

Net change
1,868

 
—

Premises and equipment:
 
 
 
Purchases
(11,944
)
 
(5,176
)
Proceeds from sales
101

 
—

Net cash (used in) investing activities
(284,755
)
 
(225,349
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change:
 
 
 
Checking, savings, and money market deposits
408,951

 
219,909

Time deposits
(159,611
)
 
(66,486
)
Wholesale deposits
96,763

 
144,786

FHLB and other borrowings
110,000

 
(415,000
)
Federal funds
(287,000
)
 
(963,000
)
Securities sold under agreements to repurchase
(36
)
 
754


7
Table of Contents

Net investment by (distribution to) noncontrolling interests
(3,111
)
 
—

Proceeds from other liabilities
7,525

 


Principal payments:
 
 
 
Other liabilities
(9,404
)
 
—

Capital lease obligations
(64
)
 
(46
)
Cash dividends paid
(5,874
)
 
(3,778
)
Purchase of shares by ESOP
2,010

 
1,606

Issuance of restricted stock
3

 
2

Proceeds from exercise of stock options and issuance of common stock
92

 
147

Shares repurchased
(45,980
)
 
(2,131
)
Net cash provided by (used in) financing activities
114,264

 
(1,083,237
)
 
 
 
 
Effect of exchange rate changes on cash
(24
)
 
—

 
 
 
 
Net change in cash and cash equivalents
755

 
(1,196,310
)
 
 
 
 
Cash and cash equivalents at beginning of year
99,977

 
1,267,586

Cash and cash equivalents at end of year
$
100,732

 
$
71,276



META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Con't.)
 
Nine Months Ended June 30,
 
2019
 
2018
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
19,220

 
$
17,746

Income taxes
(247
)
 
8,211

Franchise taxes
184

 
199

Other taxes
539

 
129

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Transfers
 
 
 
Loans and leases to foreclosed real estate or other assets
105

 
29,922

Loans and leases to rental equipment
229

 
—

Loans transferred to held for sale
39,452

 
—

Purchases/Sales of investment securities accrued, not settled
 
 
 
Purchases - Available for sale
1,721

 
4,117

Securities transferred from held-to-maturity to available-for-sale
—

 
306,000

Short- and long-term borrowings transferred from other liabilities
20,026

 
—

See Notes to Condensed Consolidated Financial Statements.

8
Table of Contents


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, 2018 included in Meta Financial Group, Inc.’s (“Meta” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 29, 2018.  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 three- and nine-month periods ended June 30, 2019 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2019.

All share and per share data reported in this Form 10-Q has been adjusted to reflect the 3-for-1 forward stock split of the Company's common stock effected by the Company on October 4, 2018.

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.

Certain amounts in the Recorded Investment table presented in Note 4 to the consolidated financial statements have been restated from what was previously reported as of September 30, 2018 on Form 10-K.

Loan and lease tables have been conformed to be consistent with the Company's updated presentation of its lending portfolio. The new presentation includes expanding the commercial and consumer finance portfolio to present the lending categories that are included in each, presenting the warehouse finance portfolio as its own category, and condensing the community bank loan categories. Warehouse finance loans were previously included in the consumer finance portfolio. All current and prior period numbers are reflective of this new presentation and total loan and lease balances remained unchanged.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES ("ASU")

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of September 30, 2018 remain substantially unchanged with the exception of the policies impacted by the adoption of noted ASUs below.

Adopted ASUs
Revenue Recognition - The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), subsequent related Updates (collectively, ASU 2014-09), and ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage of Certain Prepaid Stored-Value Products on October 1, 2018. ASU 2014-09 modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. Upon adoption, the Company recorded a cumulative-effect adjustment of $1.5 million to retained earnings, net of tax, due to changes in timing of revenue recognition from breakage of unregistered, unused prepaid cards in the Company’s Meta Payment Systems (MPS) division. Refer to Note 13. Revenue from Contracts with Customers for additional information.


9
Table of Contents

Financial Instruments - The Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities and related Updates (collectively, ASU 2016-01) on October 1, 2018. ASU 2016-01 makes several revisions to Subtopic 825-10, including that ASU 2016-01: (1) requires equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplifies impairment assessment of equity investments without readily determinable fair value, (3) eliminates requirement to disclose methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost, (4) requires the use of an exit price notion when measuring fair value of financial instruments for disclosure purposes, and (5) requires separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet and accompanying notes. Upon adoption, the Company recorded a cumulative-effect adjustment that reclassed $0.5 million, net of tax, from accumulated other comprehensive income to retained earnings, due to the Company’s cumulative change in fair value of equity securities with readily determinable fair value. Refer to Note 6. Securities for additional information.

The Company also adopted the following ASUs on October 1, 2018, none of which had a material impact on the Company’s consolidated financial statements.
–
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
–
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
–
ASU 2017-01, Clarifying the Definition of a Business
–
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
–
ASU 2017-05, Other Income - Gains and Losses from Derecognition of Non-Financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and accounting for Partial Sales of Non-Financial Assets
–
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

ASUs to be Adopted
Leases - ASU 2016-02, Leases (Topic 842), and related Updates (collectively Topic 842) will become effective for the Company on October 1, 2019. For lessees, Topic 842 establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with such classification affecting the pattern and classification of expense recognition in the income statement. For lessors, the guidance with Topic 842 is largely unchanged from current guidance.
A modified retrospective transition approach is required. An entity may choose to use either (1) the standard’s effective date or (2) the beginning of the earliest comparative period presented in the financial statements, as the date of initial application. The Company expects to adopt Topic 842 using the effective date, October 1, 2019, as the date of initial application. Consequently, financial information will not be updated and disclosures required under Topic 842 will not be provided for dates and periods before October 1, 2019.
FASB has released several updates to Topic 842 through subsequent ASUs, many of which allow for practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements, with the latter not being applicable to the Company. The new standard also provides practical expedients for a lessee’s and lessor’s ongoing accounting. The Company expects to elect the short-term lease recognition exemption for all leases that qualify.
Management has evaluated the Company’s leasing contracts and activities and is developing methodologies and processes to estimate and account for right-of-use assets and lease liabilities based on the present value of future lease payments. While the recognition of right-of-use assets will increase total consolidated assets as well as the Company’s risk-weighted assets, management does not expect the impact to capital ratios to be material. The adoption of this guidance is not expected to result in a material change to lessee expense recognition. Management expects the changes in lessor accounting to result in earlier recognition of expense due to a narrower definition of initial direct costs and presentation changes on the income statement due to costs excluded from contract consideration that are reimbursed by the lessee, in addition to other operational impacts.
Other Upcoming ASUs - Refer to the Company’s most recently audited consolidated financial statements for the year ended September 30, 2018 for the latest update on other ASUs relevant to the Company and not yet adopted as of June 30, 2019.

Table of Contents


NOTE 3. ACQUISITIONS

The Company acquired Crestmark Bancorp, Inc. ("Crestmark") and its bank subsidiary, Crestmark Bank, on August 1, 2018 for a purchase price of $295.8 million paid by issuance of 9,919,512 shares of Meta common stock. The initial accounting for certain liabilities and goodwill were incomplete and the amounts recorded were considered provisional. The Company recognized certain measurement period adjustments, discussed below, as of June 30, 2019. The amount of goodwill recorded remains provisional, as well as the other assets and liabilities noted in the table below. The measurement period remains open for the Crestmark acquisition until August 1, 2019. The following table summarizes the allocation of the purchase price to net assets of Crestmark as of the August 1, 2018 acquisition date.
(Dollars in Thousands)
Estimated fair value as previously reported(a)
 
Measurement period adjustments
 
Fair value as adjusted
Rental Equipment
$
98,977

 
$
(3,355
)
 
$
95,622

Intangible assets
28,253

 
(117
)
 
28,136

Goodwill
204,547

 
4,671

 
209,218

Accrued expenses and other liabilities
88,301

 
1,199

 
89,500

Net other assets
55,464

 
—

 
55,464

Noncontrolling interest
3,167

 
—

 
3,167

Purchase price
295,773

 
—

 
295,773

(a) As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018

Measurement Period Adjustments and Impairment - DC Solar
The Company previously purchased a portfolio of mobile solar generators ("MSGs") from DC Solar Solutions, Inc. and certain of its affiliates, a relationship in the Company's solar leasing business, and, in turn, leased the MSGs to DC Solar Distribution, Inc., an affiliate of DC Solar Solutions. During the second fiscal quarter of 2019, the Company became aware that the DC Solar entities and their affiliates filed for bankruptcy and the entities, including their principals, are subjects of ongoing federal investigations involving allegations of fraudulent misconduct. The Company had three separate operating leases with DC Solar - two of the transactions were included in the acquired Crestmark balances on August 1, 2018. The third transaction was originated in August 2018 after the Crestmark acquisition date. The Company considered the bankruptcy filing and fraud allegations as new facts and circumstances and concluded the alleged fraud existed at the acquisition date for the acquired DC Solar transactions. As a result, the identified impairment for the acquired DC Solar transactions and other related adjustments were recorded as measurement period adjustments to the acquired assets and liability amounts recognized and were offset through provisional goodwill. The impairment and related adjustments for the DC Solar transaction originated post-acquisition are reflected in current earnings.
The Company has repossessed 173 of the 176 underlying assets and is in the process of performing repairs and general maintenance to the assets where needed to ensure they are in prime condition for re-lease. As of June 30, 2019 the Company is continuing its repossession efforts with respect to the remaining three units. The timing and extent to which the Company will be able to re-lease the underlying assets remains uncertain as the Company is actively marketing the units. The adjustments to goodwill and impairment recognized for the DC Solar events reflect the Company's best estimate of the potential loss incurred, based on the Company's present understanding of the relevant facts. Assumptions utilized in the estimate included recoverability of the MSGs and the Company's ability to re-lease them, contractual rents, and residual values. As new facts and circumstances become available, the Company will assess any remaining exposure with respect to these DC Solar matters to determine whether additional adjustments to goodwill and/or impairment loss are necessary. As long as the required criteria under GAAP are met, the Company will continue to account for adjustments to the acquired DC Solar transactions as adjustments to goodwill until the measurement period closes, which will not extend beyond August 1, 2019. During the fiscal quarter ended March 31, 2019, the Company recognized a net decrease in net income of $6.6 million and a net decrease of $8.5 million in regulatory capital as a result of the DC Solar bankruptcy and ongoing federal investigation. There were no additional adjustments recorded due to the DC Solar events in the three months ended June 30, 2019.

Table of Contents

Measurement Period Adjustments - Other
The Company recorded additional measurement period adjustments in the second and third fiscal quarters of 2019 for provisional tax and compensation liabilities assumed through the Crestmark acquisition. The Company obtained additional information about facts and circumstances existing at the Crestmark acquisition date that resulted in an increase to liabilities and goodwill recognized of $2.2 million.

NOTE 4. LOANS AND LEASES, NET
Loan and lease tables have been conformed to be consistent with the Company's updated categorization of its lending portfolio between National Lending and Community Banking.
Loans and leases at June 30, 2019 and September 30, 2018 were as follows:
 
June 30, 2019
 
September 30, 2018
National Lending
(Dollars in Thousands)
Asset based lending
$
615,309

 
$
477,917

Factoring
320,344

 
284,221

Lease financing
341,957

 
265,315

Insurance premium finance
358,772

 
337,877

SBA/USDA
99,791

 
59,374

Other commercial finance
99,677

 
85,145

Commercial finance
1,835,850

 
1,509,849

Consumer credit products
155,539

 
80,605

Other consumer finance
164,727

 
189,756

Consumer finance(1)
320,266

 
270,361

Tax services
24,410

 
1,073

Warehouse finance(1)
250,003

 
65,000

Total National Lending
2,430,529

 
1,846,283

Community Banking
 
 
 
Commercial real estate and operating
877,412

 
790,890

Consumer one-to-four family real estate and other
256,853

 
247,318

Agricultural real estate and operating
61,169

 
60,498

Total Community Banking
1,195,434

 
1,098,706

Total gross loans and leases
3,625,963

 
2,944,989

 
 
 
 
Allowance for loan and lease losses
(43,505
)
 
(13,040
)
Net deferred loan origination fees (costs)
5,068

 
(250
)
Total loans and leases, net(2)
$
3,587,526

 
$
2,931,699


(1) Warehouse finance loans are presented in their own line. Previously these balances were included with consumer finance loans. Prior period balances have also been adjusted to reflect this change.
(2) As of June 30, 2019, the remaining balance of acquired loans and leases from the Crestmark acquisition was $402.4 million and the remaining balances of the credit and interest rate mark discounts related to the acquired loans and leases held for investment were $6.8 million and $3.2 million, respectively, while the remaining balance of the interest rate mark premium related to the acquired loans held for sale was $0.7 million. On August 1, 2018, the Company acquired loans and leases from the Crestmark acquisition totaling $1.06 billion and recorded related credit and interest rate mark discounts of $12.3 million and $6.0 million, respectively.

During the nine months ended June 30, 2019, the Company transferred $39.5 million of consumer credit product loans to held for sale and originated $104.1 million of SBA/USDA and consumer credit product loans as held for sale. The Company sold held for sale loans resulting in proceeds of $95.7 million and gains on sale of $3.7 million during the nine months ended June 30, 2019. During the nine months ended June 30, 2018, the Company did not designate any loans as held for sale or sell any held for sale loans.


Table of Contents

Loans purchased and sold by portfolio segment, including participation interests, for the three and nine months ended June 30, 2019 and 2018 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Loans Purchased
(Dollars in Thousands)
Loans held for sale
$
6,703

 
$
—

 
$
12,643

 
$
—

Loans held for investment:
 
 
 
 
 
 
 
Total National Lending
72,737

 
—

 
198,328

 
72,751

Total Community Banking
2,710

 
6,183

 
21,223

 
22,418

Total purchases
82,150

 
6,183

 
232,194

 
95,169

Loans Sold
 
 
 
 
 
 
 
Loans held for sale
57,661

 
—

 
92,565

 
—

Loans held for investment:
 
 
 
 
 
 
 
Total Community Banking
2,212

 
10,379

 
13,069

 
19,961

Total sales
$
59,873

 
$
10,379

 
$
105,634

 
$
19,961



The net investment in direct financing and sales-type leases was comprised of the following as of June 30, 2019 and September 30, 2018.
 
June 30, 2019
 
September 30, 2018
 
(Dollars in Thousands)
Minimum lease payments receivable
$
388,291

 
$
301,835

Estimated residual value of leased equipment
12,128

 
12,406

Unamortized initial direct costs
5,173

 
1,806

Premium on acquired leases
3

 
26

Unearned income
(58,450
)
 
(48,949
)
Net investment in direct financing and sales-type leases
$
347,145

 
$
267,124



Future minimum lease payments receivable on noncancelable direct financing and sales-type leases were as follows as of June 30, 2019.
 
As of June 30, 2019
 
(Dollars in thousands)
Remaining in 2019
$
36,473

2020
129,577

2021
104,805

2022
67,262

2023
37,753

2024 and thereafter
12,421

Total
$
388,291


The Company did not record any contingent rental income from sales-type and direct financing leases in the nine months ended June 30, 2019.


13
Table of Contents

Activity in the allowance for loan and lease losses and balances of loans and leases by portfolio segment for each of the three and nine months ended June 30, 2019 and 2018 was as follows:
Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Three Months Ended June 30, 2019
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
3,499

 
$
2,685

 
$
(1,380
)
 
$
3

 
$
4,807

Factoring
1,761

 
2,747

 
(1,335
)
 
31

 
3,204

Lease financing
1,965

 
(13
)
 
(736
)
 
203

 
1,419

Insurance premium finance
919

 
201

 
(275
)
 
171

 
1,016

SBA/USDA
474

 
449

 
—

 
—

 
923

Other commercial finance
525

 
432

 
—

 
—

 
957

Commercial finance
9,143

 
6,501

 
(3,726
)
 
408

 
12,326

Consumer credit products
1,314

 
142

 
—

 
—

 
1,456

Other consumer finance
5,130

 
1,890

 
(1,398
)
 
28

 
5,650

Consumer finance
6,444

 
2,032

 
(1,398
)
 
28

 
7,106

Tax services
24,102

 
914

 
(9,627
)
 
36

 
15,425

Warehouse finance
185

 
65

 
—

 
—

 
250

Total National Lending
39,874

 
9,512

 
(14,751
)
 
472

 
35,107

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
6,673

 
(249
)
 
—

 
—

 
6,424

Consumer one-to-four family real estate and other
958

 
(65
)
 
—

 
—

 
893

Agricultural real estate and operating
1,167

 
(86
)
 
—

 
—

 
1,081

Total Community Banking
8,798

 
(400
)
 
—

 
—

 
8,398

Total
$
48,672

 
$
9,112

 
$
(14,751
)
 
$
472

 
$
43,505


14
Table of Contents

Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Nine Months Ended June 30, 2019
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
107

 
$
6,213

 
$
(1,642
)
 
$
129

 
$
4,807

Factoring
64

 
5,769

 
(2,711
)
 
82

 
3,204

Lease financing
59

 
1,529

 
(2,198
)
 
2,029

 
1,419

Insurance premium finance
1,031

 
2,091

 
(2,359
)
 
253

 
1,016

SBA/USDA
13

 
910

 
—

 
—

 
923

Other commercial finance
28

 
929

 
—

 
—

 
957

Commercial finance
1,302

 
17,441

 
(8,910
)
 
2,493

 
12,326

Consumer credit products
785

 
671

 
—

 
—

 
1,456

Other consumer finance
2,820

 
8,249

 
(5,477
)
 
58

 
5,650

Consumer finance
3,605

 
8,920

 
(5,477
)
 
58

 
7,106

Tax services
—

 
24,883

 
(9,670
)
 
212

 
15,425

Warehouse finance
65

 
185

 
—

 
—

 
250

Total National Lending
4,972

 
51,429

 
(24,057
)
 
2,763

 
35,107

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
6,220

 
204

 
—

 
—

 
6,424

Consumer one-to-four family real estate and other
632

 
281

 
(20
)
 
—

 
893

Agricultural real estate and operating
1,216

 
(385
)
 
—

 
250

 
1,081

Total Community Banking
8,068

 
100

 
(20
)
 
250

 
8,398

Total
$
13,040

 
$
51,529

 
$
(24,077
)
 
$
3,013

 
$
43,505



Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Three Months Ended June 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Insurance premium finance
$
746

 
$
304

 
$
(243
)
 
$
99

 
$
906

Other commercial finance
4

 
8

 
—

 
—

 
12

Commercial finance
750

 
312

 
(243
)
 
99

 
918

Consumer credit products
—

 
264

 
—

 
—

 
264

Other consumer finance
—

 
3,000

 
—

 
—

 
3,000

Consumer finance
—

 
3,264

 
—

 
—

 
3,264

Tax services
19,573

 
1,189

 
(10,507
)
 
1

 
10,256

Total National Lending
20,323

 
4,765

 
(10,750
)
 
100

 
14,438

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
4,100

 
687

 
—

 
—

 
4,787

Consumer one-to-four family real estate and other
901

 
(218
)
 
—

 
—

 
683

Agricultural real estate and operating
765

 
(51
)
 
—

 
207

 
921

Unallocated
989

 
132

 
—

 
—

 
1,121

Total Community Banking
6,755

 
550

 
—

 
207

 
7,512

Total
$
27,078

 
$
5,315

 
$
(10,750
)
 
$
307

 
$
21,950



15
Table of Contents

Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Nine Months Ended June 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Insurance premium finance
$
796

 
$
569

 
$
(711
)
 
$
252

 
$
906

Other commercial finance
4

 
8

 
—

 
—

 
12

Commercial finance
800

 
577

 
(711
)
 
252

 
918

Consumer credit products
—

 
264

 
—

 
—

 
264

Other consumer finance
—

 
3,000

 
—

 
—

 
3,000

Consumer finance
—

 
3,264

 
—

 
—

 
3,264

Tax services
5

 
20,335

 
(10,507
)
 
423

 
10,256

Total National Lending
805

 
24,176

 
(11,218
)
 
675

 
14,438

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
2,820

 
1,967

 
—

 
—

 
4,787

Consumer one-to-four family real estate and other
809

 
(98
)
 
(31
)
 
3

 
683

Agricultural real estate and operating
2,574

 
(1,914
)
 
—

 
261

 
921

Unallocated
526

 
595

 
—

 
—

 
1,121

Total Community Banking
6,729

 
550

 
(31
)
 
264

 
7,512

Total
$
7,534

 
$
24,726

 
$
(11,249
)
 
$
939

 
$
21,950


The following tables provide details regarding the allowance for loan and lease losses and balance by type of allowance as of June 30, 2019 and September 30, 2018.
 
Allowance
 
Loans and Leases
Recorded Investment
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
 
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
As of June 30, 2019
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
12

 
$
4,795

 
$
4,807

 
$
8,119

 
$
607,190

 
$
615,309

Factoring
255

 
2,949

 
3,204

 
7,795

 
312,549

 
320,344

Lease financing
—

 
1,419

 
1,419

 
5,455

 
336,502

 
341,957

Insurance premium finance
—

 
1,016

 
1,016

 
—

 
358,772

 
358,772

SBA/USDA
—

 
923

 
923

 
1,276

 
98,515

 
99,791

Other commercial finance
—

 
957

 
957

 
—

 
99,677

 
99,677

Commercial finance
267

 
12,059

 
12,326

 
22,645

 
1,813,205

 
1,835,850

Consumer credit products
—

 
1,456

 
1,456

 
—

 
155,539

 
155,539

Other consumer finance
—

 
5,650

 
5,650

 
1,039

 
163,688

 
164,727

Consumer finance
—

 
7,106

 
7,106

 
1,039

 
319,227

 
320,266

Tax services
—

 
15,425

 
15,425

 
—

 
24,410

 
24,410

Warehouse finance
—

 
250

 
250

 
—

 
250,003

 
250,003

Total National Lending
267

 
34,840

 
35,107

 
23,684

 
2,406,845

 
2,430,529

Community Banking
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
—

 
6,424

 
6,424

 
319

 
877,093

 
877,412

Consumer one-to-four family real estate and other
—

 
893

 
893

 
290

 
256,563

 
256,853

Agricultural real estate and operating
—

 
1,081

 
1,081

 
1,237

 
59,932

 
61,169

Total Community Banking
—

 
8,398

 
8,398

 
1,846

 
1,193,588

 
1,195,434

Total
$
267

 
$
43,238

 
$
43,505

 
$
25,530

 
$
3,600,433

 
$
3,625,963



16
Table of Contents

 
Allowance
 
Loans and Leases
Recorded Investment
Ending balance: individually evaluated for impairment(1)
 
Ending balance: collectively evaluated for impairment(1)
 
Total
 
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
As of September 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
—

 
$
107

 
$
107

 
$
1,404

 
$
476,513

 
$
477,917

Factoring
—

 
64

 
64

 
3,331

 
280,890

 
284,221

Lease financing
—

 
59

 
59

 
8,877

 
256,438

 
265,315

Insurance premium finance
—

 
1,031

 
1,031

 
—

 
337,877

 
337,877

SBA/USDA
—

 
13

 
13

 
—

 
59,374

 
59,374

Other commercial finance
—

 
28

 
28

 
—

 
85,145

 
85,145

Commercial finance
—

 
1,302

 
1,302

 
13,612

 
1,496,237

 
1,509,849

Consumer credit products
—

 
785

 
785

 
—

 
80,605

 
80,605

Other consumer finance
—

 
2,820

 
2,820

 
—

 
189,756

 
189,756

Consumer finance
—

 
3,605

 
3,605

 
—

 
270,361

 
270,361

Tax services
—

 
—

 
—

 
—

 
1,073

 
1,073

Warehouse finance
—

 
65

 
65

 
—

 
65,000

 
65,000

Total National Lending
—

 
4,972

 
4,972

 
13,612

 
1,832,671

 
1,846,283

Community Banking
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
—

 
6,220

 
6,220

 
451

 
790,439

 
790,890

Consumer one-to-four family real estate and other
—

 
632

 
632

 
94

 
247,224

 
247,318

Agricultural real estate and operating
—

 
1,216

 
1,216

 
1,454

 
59,044

 
60,498

Total Community Banking
—

 
8,068

 
8,068

 
1,999

 
1,096,707

 
1,098,706

Total
$
—

 
$
13,040

 
$
13,040

 
$
15,611

 
$
2,929,378

 
$
2,944,989

(1) Balances have been restated from what was previously reported as of September 30, 2018 on the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2018.

Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Bank's primary regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.”  The loan and lease 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 a 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 a credit 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 will have well-defined weaknesses creating a distinct possibility 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.


17
Table of Contents

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 Company 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 Company'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 and leases to an individual, a specific industry, or a geographic location.  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 Company’s Tier 1 Capital plus the Allowance for Loan and Lease Losses.
 
The asset classification of loans and leases at June 30, 2019 and September 30, 2018 were as follows:
Asset Classification
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
June 30, 2019
(Dollars in Thousands)
 
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
539,623

 
$
—

 
$
67,567

 
$
8,119

 
$
615,309

Factoring
272,589

 
—

 
39,960

 
7,795

 
320,344

Lease financing
323,539

 
—

 
12,963

 
5,455

 
341,957

Insurance premium finance
358,772

 
—

 
—

 
—

 
358,772

SBA/USDA
90,110

 
—

 
8,405

 
1,276

 
99,791

Other commercial finance
99,108

 
—

 
569

 
—

 
99,677

Commercial finance
1,683,741

 
—

 
129,464

 
22,645

 
1,835,850

Consumer credit products
155,539

 
—

 
—

 
—

 
155,539

Other consumer finance
164,727

 
—

 
—

 
—

 
164,727

Consumer finance
320,266

 
—

 
—

 
—

 
320,266

Tax services
24,410

 
—

 
—

 
—

 
24,410

Warehouse finance
250,003

 
—

 
—

 
—

 
250,003

Total National Lending
2,278,420

 
—

 
129,464

 
22,645

 
2,430,529

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
866,255

 
3,962

 
3,487

 
3,708

 
877,412

Consumer one-to-four family real estate and other
254,959

 
1,403

 
462

 
29

 
256,853

Agricultural real estate and operating
42,808

 
4,148

 
5,615

 
8,598

 
61,169

Total Community Banking
1,164,022

 
9,513

 
9,564

 
12,335

 
1,195,434

Total loans and leases
$
3,442,442

 
$
9,513

 
$
139,028

 
$
34,980

 
$
3,625,963




18
Table of Contents

Asset Classification
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
September 30, 2018
(Dollars in Thousands)
 
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
418,635

 
$
—

 
$
57,877

 
$
1,405

 
$
477,917

Factoring
248,246

 
—

 
32,644

 
3,331

 
284,221

Lease financing
252,487

 
—

 
3,951

 
8,877

 
265,315

Insurance premium finance
336,296

 
—

 
1,581

 
—

 
337,877

SBA/USDA
39,093

 
—

 
20,281

 
—

 
59,374

Other commercial finance
85,145

 
—

 
—

 
—

 
85,145

Commercial finance
1,379,902

 
—

 
116,334

 
13,613

 
1,509,849

Consumer credit products
80,605

 
—

 
—

 
—

 
80,605

Other consumer finance
189,756

 
—

 
—

 
—

 
189,756

Consumer finance
270,361

 
—

 
—

 
—

 
270,361

Tax services
1,073

 
—

 
—

 
—

 
1,073

Warehouse finance
65,000

 
—

 
—

 
—

 
65,000

Total National Lending
1,716,336

 
—

 
116,334

 
13,613

 
1,846,283

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
778,445

 
12,251

 
194

 
—

 
790,890

Consumer one-to-four family real estate and other
246,463

 
537

 
239

 
79

 
247,318

Agricultural real estate and operating
42,292

 
2,447

 
4,872

 
10,887

 
60,498

Total Community Banking
1,067,200

 
15,235

 
5,305

 
10,966

 
1,098,706

Total loans and leases
$
2,783,536

 
$
15,235

 
$
121,639

 
$
24,579

 
$
2,944,989


National Lending (Commercial Finance, Consumer Finance, Tax Services and Warehouse Finance)

Commercial Finance
The Company's commercial finance product lines include asset-based lending, factoring, leasing, commercial insurance premium finance, and other commercial finance products offered on a nationwide basis. Asset-based lending and factoring primarily service small businesses that are startups, distressed and/or generally that may not otherwise qualify for traditional bank financing. Leasing focuses on providing equipment finance solutions to mid-market companies. These product offerings supplement the asset generation capacity in our community bank and tax services divisions and enhance the overall yield of our loan and lease portfolio, enabling us to earn attractive risk-adjusted net interest margins.

Asset-Based Lending. Through its Crestmark division, the Bank provides asset-based loans secured by short-term assets such as inventory, accounts receivable, and work-in-process. Asset-based loans may also be secured by real estate and equipment. The primary sources of repayment are the operating income of the borrower, the collection of the receivables securing the loan, and/or the sale of the inventory securing the loan. Loans are typically revolving lines of credit with terms of one to three years, whereby the Bank withholds a contingency reserve representing the difference between the amount advanced and the fair value of the invoice amount or other collateral value. Credit risk is managed through advance rates appropriate for the collateral, standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the debtors' cash receipts. The Bank also originates collateralized term loans and notes receivable, with terms ranging from three to 25 years.

Factoring. Through its Crestmark division, the Bank provides factoring lending where clients provide detailed inventory, accounts receivable, and work-in-process reports for lending arrangements. The factoring clients are diversified as to industry and geography. With these loans, the Crestmark division withholds a contingency reserve, which is the difference between the fair value of the invoice amount or other collateral value and the amount advanced. This reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable.


19
Table of Contents

Lease Financing. Through its Crestmark division, the Bank provides creative, flexible lease solutions for technology, capital equipment and select transportation assets like tractors and trailers. Direct financing leases and sales-type leases substantially transfer the benefits and risks of equipment ownership to the lessee.  The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value.  Residual values are estimated at the inception of the lease.  Lease maturities are generally no greater than 84 months. The focus in this lease financing category is to support middle market companies by providing a variety of financing products to help them meet their business objectives.

Insurance Premium Finance. Through its AFS/IBEX division the Bank provides, on a national basis, 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.  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 10 months on average.  The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest. 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.

Small Business Administration ("SBA") and United States Department of Agriculture ("USDA"). The Bank originates loans through programs partially guaranteed by the SBA or USDA. These loans are made to small businesses and professionals with what the Bank believes are lower risk characteristics.

Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans to customers of the Crestmark division.

Consumer Finance
Consumer Credit Products. Through the acquisition of Specialty Consumer Services, the Bank acquired a platform that provides a total solution for marketplace lending, including underwriting and loan management in the direct-to-consumer credit business. The acquired platform allows the Bank to provide innovative lending solutions through consumer credit products. The Company designs and structures its credit programs in an effort to insulate the Company from program losses and to potentially increase the liquidity attributes of such lending programs' marketability to potential bank or other purchasers. While each program is different, all contain one or more types of credit enhancements, loss protections, or trigger events. When determining the applicable program enhancement, generally, the Company uses proprietary data provided by the Company’s partner, with respect to such program, supplemented with public data to design and shape appropriate loss curves, as well as implement stresses significantly higher than base to provide protection in changing credit cycles. Credit enhancements are typically built through holding excess program interest and fees in a reserve account to pay program credit losses. Cash flow waterfall positioning allows for losses and Company program principal and interest to be paid, under certain circumstances, before servicing or other program expenses. Trigger events allow programs and originations to be suspended if certain vintage loss limits, during a specific period of time, are triggered or if cumulative loss percentages are triggered. These triggers are designed to allow the Company to address potential issues quickly. Other trigger events in certain programs provide for excess credit or reserve enhancements, which could be beyond excess interest amounts, if certain loss triggers are breached. The Bank applies a reserve for loan losses of approximately 1% on outstanding loan balances within each of the consumer credit product programs.

Through June 30, 2019, the Bank has launched two consumer credit programs. During the second quarter of fiscal 2018, the Bank entered into a three years program agreement with Liberty Lending, LLC ("Liberty Lending") whereby the Bank provides personal loans to Liberty Lending customers. The Bank and Liberty Lending market the program jointly through a wide variety of marketing channels. The loan products under the agreement with Liberty Lending are closed-end installment loans ranging from $3,500 to $45,000 in initial principal amount with durations between 13 months and 60 months.


20
Table of Contents

The Bank entered into an agreement for 3 years with Health Credit Services ("HCS") during the third quarter of fiscal 2018. The Bank approves and originates loans for elective medical procedures for select HCS provider offices throughout the United States. HCS works with its provider partners to market the loans, as well as provide servicing for them. The loan products offered are unsecured, closed-end installment loans with terms between 12 months and 84 months and revolving lines of credit with durations between six months and 60 months.

Other Consumer Finance. The Bank's purchased student loan portfolios are seasoned, floating rate, private portfolios that are serviced by a third-party servicer. The portfolio purchased during the first quarter of fiscal year 2018 is indexed to one-month LIBOR, while the portfolio purchased in the first quarter of fiscal year 2017 is indexed to three-month LIBOR plus various margins. The Company received written notification on June 18, 2018 from ReliaMax Surety Company ("ReliaMax"), the company that provided insurance coverage for the student loan portfolios, which informed policy holders that the South Dakota Division of Insurance filed a petition to have ReliaMax declared insolvent and to adopt a plan of liquidation. An Order of Liquidation was entered on June 27, 2018 by the Sixth Circuit Court in Hughes County, South Dakota, declaring ReliaMax insolvent and appointing the South Dakota Division of Insurance as liquidator to adopt a plan of liquidation. The Company expects to ultimately recover a portion of the unearned premiums, though the Company can provide no assurance as to the timing and amount of any such recovery.

Tax Services
The Bank's tax services division provides short-term taxpayer advance loans. Taxpayers are underwritten to determine eligibility for these unsecured loans. Due to the nature of taxpayer advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. The Bank will charge off the balance of a taxpayer advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful.

Through its tax services division, the Bank provides short-term electronic return originator ("ERO") advance loans on a nationwide basis. These loans are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. ERO loans are not collateralized. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.

Warehouse Finance
In fiscal 2018, the Bank entered into a first-out participation agreement in a consumer receivable asset-backed warehouse line of credit, with the Bank holding a senior collateral position enhanced by a subordinate party structure. During the first quarter of fiscal 2019, the Bank entered into two additional first-out participation agreements in asset-backed warehouse lines of credit, including consumer loan receivables and small business loan receivables. The senior collateral position of the Bank is supported by a subordinate party position. During the third quarter of fiscal 2019, the Bank entered into a first-out participation agreement in a consumer receivable asset-backed warehouse line of credit, with the Bank holding a senior collateral position enhanced by a subordinate party structure.

Community Banking

Commercial Real Estate and Operating. The Company engages in commercial and multi-family real estate lending in the community bank's primary market areas and surrounding areas. These loans are 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 property securing the loan, 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.
 
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.


21
Table of Contents

The Company originates its community banking commercial operating loans primarily in the community bank's market areas.  Most of these 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.  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 Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s management ability, 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. 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 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.

Consumer One-to-Four Family Real Estate and Other. One-to-four family real estate loan originations are typically generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate loans and adjustable-rate mortgage ("ARM") loans for both permanent structures and those under construction. The Company’s one-to-four family real estate loan originations are secured primarily by properties located in the community bank's primary market areas and surrounding areas.

The Company originates one-to-four family real estate 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 property securing the loan or the contract price. However, the vast majority of these loans are originated with loan-to-value ratios below 80%. 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. Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, which may conform to secondary market standards such as those imposed by Fannie Mae, Ginnie Mae, and Freddie Mac. The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales. The Company also offers ARM loans with terms up to five years and ten years.
 
In underwriting one-to-four family 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 of the Company.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as 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 that allows 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.

The Company originates a variety of secured consumer loans, including home equity, home improvement, automobile and boat loans, as well as loans secured by savings deposits in its primary market areas and surrounding areas. Substantially all of the Company’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Bank will lend amounts that, 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.

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.


22
Table of Contents

Agricultural Real Estate and Operating. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer, and other farm-related products, primarily in its market areas. Agricultural operating loans are originated at either an adjustable- or fixed-rate of interest for up to a 1 year term or, in the case of livestock, are due upon sale. 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 5 years to 10 years, after which the loan will balloon or the interest rate will adjust annually. These loans generally amortize over a period of 20 to 25 years. Fixed-rate agricultural real estate loans typically have terms up to 10 years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
  
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 such as weather, government support programs and grain and livestock prices. These risks may be reduced, by the farmer, with the use of crop insurance coverage and futures contracts or options to mitigate price risk, both of which the Company frequently requires of the borrowers to help ensure loan repayment. Many farms are also dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.
 
Past due loans and leases at June 30, 2019 and September 30, 2018 were as follows:
 
Accruing and Non-accruing Loans and Leases
 
Non-performing Loans and Leases
Past Due Loans and Leases
30-59 Days
Past Due
 
60-89 Days
Past Due
 
>
89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans and Leases
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
June 30, 2019
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
1,701

 
$
428

 
$
2,890

 
$
5,019

 
$
610,290

 
$
615,309

 
$
180

 
$
5,654

 
$
5,834

Factoring
—

 
—

 
20

 
20

 
320,324

 
320,344

 
—

 
4,846

 
4,846

Lease financing
2,080

 
1,816

 
5,408

 
9,304

 
332,653

 
341,957

 
4,225

 
1,936

 
6,161

Insurance premium finance
2,233

 
1,081

 
1,679

 
4,993

 
353,779

 
358,772

 
1,679

 
—

 
1,679

SBA/USDA
85

 
—

 
259

 
344

 
99,447

 
99,791

 
—

 
259

 
259

Other commercial finance
—

 
—

 
—

 
—

 
99,677

 
99,677

 
—

 
—

 
—

Commercial finance
6,099

 
3,325

 
10,256

 
19,680

 
1,816,170

 
1,835,850

 
6,084

 
12,695

 
18,779

Consumer credit products
1,454

 
1,039

 
703

 
3,196

 
152,343

 
155,539

 
703

 
—

 
703

Other consumer finance
996

 
614

 
1,083

 
2,693

 
162,034

 
164,727

 
1,083

 
—

 
1,083

Consumer finance
2,450

 
1,653

 
1,786

 
5,889

 
314,377

 
320,266

 
1,786

 
—

 
1,786

Tax services
—

 
24,410

 
—

 
24,410

 
—

 
24,410

 
—

 
—

 
—

Warehouse finance
—

 
—

 
—

 
—

 
250,003

 
250,003

 
—

 
—

 
—

Total National Lending
8,549

 
29,388

 
12,042

 
49,979

 
2,380,550

 
2,430,529

 
7,870

 
12,695

 
20,565

Community Banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
—

 
—

 
—

 
—

 
877,412

 
877,412

 
—

 
—

 
—

Consumer one-to-four family real estate and other
54

 
36

 
233

 
323

 
256,530

 
256,853

 
—

 
233

 
233

Agricultural real estate and operating
1,745

 
—

 
—

 
1,745

 
59,424

 
61,169

 
—

 
—

 
—

Total Community Banking
1,799

 
36

 
233

 
2,068

 
1,193,366

 
1,195,434

 
—

 
233

 
233

Total Loans and Leases
$
10,348

 
$
29,424

 
$
12,275

 
$
52,047

 
$
3,573,916

 
$
3,625,963

 
$
7,870

 
$
12,928

 
$
20,798



23
Table of Contents

 
Accruing and Non-accruing Loans and Leases
 
Non-performing Loans and Leases
Past Due Loans and Leases
30-59 Days
Past Due
 
60-89 Days
Past Due
 
>
89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans and Leases
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
September 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
1,235

 
$
2,151

 
$
94

 
$
3,480

 
$
474,437

 
$
477,917

 
$
94

 
$
—

 
$
94

Factoring
—

 
—

 
—

 
—

 
284,221

 
284,221

 
—

 
—

 
—

Lease financing
16,542

 
532

 
2,921

 
19,995

 
245,320

 
265,315

 
726

 
2,864

 
3,590

Insurance premium finance
1,864

 
1,019

 
2,981

 
5,864

 
332,013

 
337,877

 
2,981

 
—

 
2,981

SBA/USDA
1,067

 
—

 
—

 
1,067

 
58,307

 
59,374

 
—

 
—

 
—

Other commercial finance
—

 
—

 
—

 
—

 
85,145

 
85,145

 
—

 
—

 
—

Commercial finance
20,708

 
3,702

 
5,996

 
30,406

 
1,479,443

 
1,509,849

 
3,801

 
2,864

 
6,665

Consumer credit products
532

 
284

 
147

 
963

 
79,642

 
80,605

 
147

 
—

 
147

Other consumer finance
2,677

 
1,311

 
2,237

 
6,225

 
183,531

 
189,756

 
2,237

 
—

 
2,237

Consumer finance
3,209

 
1,595

 
2,384

 
7,188

 
263,173

 
270,361

 
2,384

 
—

 
2,384

Tax services
—

 
—

 
1,073

 
1,073

 
—

 
1,073

 
1,073

 
—

 
1,073

Warehouse finance
—

 
—

 
—

 
—

 
65,000

 
65,000

 
—

 
—

 
—

Total National Lending
23,917

 
5,297

 
9,453

 
38,667

 
1,807,616

 
1,846,283

 
7,258

 
2,864

 
10,122

Community Banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
—

 
—

 
—

 
—

 
790,890

 
790,890

 
—

 
—

 
—

Consumer one-to-four family real estate and other
105

 
—

 
79

 
184

 
247,134

 
247,318

 
79

 
—

 
79

Agricultural real estate and operating
—

 
—

 
—

 
—

 
60,498

 
60,498

 
—

 
—

 
—

Total Community Banking
105

 
—

 
79

 
184

 
1,098,522

 
1,098,706

 
79

 
—

 
79

Total Loans and Leases
$
24,022

 
$
5,297

 
$
9,532

 
$
38,851

 
$
2,906,138

 
$
2,944,989

 
$
7,337

 
$
2,864

 
$
10,201



Certain loans and leases 89 days or more past due as to interest or principal continue to accrue because they are (1) well-secured and in the process of collection or (2) one-to-four family real estate loans or consumer loans exempt under regulatory rules from being classified as non-accrual until later delinquency, usually 120 days past due.
When analysis of borrower or lessee 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 or lease is evaluated for impairment.  Often, this is associated with a delay or shortfall in scheduled payments, as described above.


24
Table of Contents

Impaired loans and leases at June 30, 2019 and September 30, 2018 were as follows:
June 30, 2019
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
Loans and leases without a specific valuation allowance
(Dollars in Thousands)
National Lending
 
 
 
 
 
Asset based lending
$
8,024

 
$
9,362

 
$
—

Factoring
3,580

 
4,655

 
—

Lease financing
5,455

 
5,455

 
—

SBA/USDA
1,276

 
1,276

 
—

Commercial finance
18,335

 
20,748

 
—

Other consumer finance
1,039

 
1,089

 
—

Consumer finance
1,039

 
1,089

 
—

Total National Lending
19,374

 
21,837

 
—

Community Banking
 
 
 
 
 
Commercial real estate and operating
319

 
319

 
—

Consumer one-to-four family real estate and other
290

 
290

 
—

Agricultural real estate and operating
1,237

 
1,237

 
—

Total Community Banking
1,846

 
1,846

 
—

Total
$
21,220

 
$
23,683

 
$
—

Loans and leases with a specific valuation allowance
 
 
 
 
 
National Lending
 
 
 
 
 
Asset based lending
$
95

 
$
107

 
$
12

Factoring
4,215

 
5,555

 
255

Commercial finance
4,310

 
5,662

 
267

Total National Lending
4,310

 
5,662

 
267

Total
$
4,310

 
$
5,662

 
$
267


September 30, 2018
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
Loans and leases without a specific valuation allowance
(Dollars in Thousands)
National Lending
 
 
 
 
 
Asset based lending
$
1,325

 
$
1,325

 
$
—

Factoring
1,383

 
1,713

 
—

Lease financing
5,491

 
5,491

 
—

Commercial finance
8,199

 
8,529

 
—

Total National Lending
8,199

 
8,529

 
—

Community Banking
 
 
 
 
 
Commercial real estate and operating
405

 
405

 
—

Consumer one-to-four family real estate and other
140

 
140

 
—

Agricultural real estate and operating
1,454

 
1,454

 
—

Total Community Banking
1,999

 
1,999

 
—

Total
$
10,198

 
$
10,528

 
$
—

Loans and leases with a specific valuation allowance
 
 
 
 
 
National Lending
 
 
 
 
 
Asset based lending
$
79

 
$
79

 
$
22

Factoring
1,948

 
2,198

 
49

Lease financing
3,386

 
3,386

 
517

Commercial finance
5,413

 
5,663

 
588

Total National Lending
5,413

 
5,663

 
588

Total
$
5,413

 
$
5,663

 
$
588


25
Table of Contents

The following table provides the average recorded investment in impaired loans and leases for the three- and nine-month periods ended June 30, 2019 and 2018.
Three Months Ended June 30,
2019
 
2018
 
Average
Recorded
Investment
 
Recognized Interest Income
 
Average
Recorded
Investment
 
Recognized Interest Income
 
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
Asset based lending
$
6,683

 
$
88

 
$
—

 
$
—

Factoring
6,621

 
—

 
—

 
—

Lease financing
3,351

 
—

 
—

 
—

SBA/USDA
425

 
—

 
—

 
—

Commercial finance
17,080

 
88

 
—

 
—

Other consumer finance
1,190

 
28

 
—

 
—

Consumer finance
1,190

 
28

 
—

 
—

Total National Lending
18,270

 
116

 
—

 
—

Community Banking
 
 
 
 
 
 
 
Commercial real estate and operating
106

 
5

 
604

 
4

Consumer one-to-four family real estate and other
186

 
1

 
342

 
2

Agricultural real estate and operating
1,226

 
28

 
2,670

 
42

Total Community Banking
1,518

 
34

 
3,616

 
48

Total loans and leases
$
19,788

 
$
150

 
$
3,616

 
$
48

Nine Months Ended June 30,
2019
 
2018
 
Average
Recorded
Investment
 
Recognized Interest Income
 
Average
Recorded
Investment
 
Recognized Interest Income
 
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
Asset based lending
$
3,993

 
$
262

 
$
—

 
$
—

Factoring
4,178

 
5

 
—

 
—

Lease financing
5,012

 
17

 
—

 
—

SBA/USDA
142

 
—

 
—

 
—

Commercial finance
13,325

 
284

 
—

 
—

Other consumer finance
1,215

 
38

 
—

 
—

Consumer finance
1,215

 
38

 
—

 
—

Total National Lending
14,540

 
322

 
—

 
—

Community Banking
 
 
 
 
 
 
 
Commercial real estate and operating
259

 
9

 
761

 
14

Consumer one-to-four family real estate and other
154

 
3

 
224

 
11

Agricultural real estate and operating
1,371

 
63

 
1,567

 
106

Total Community Banking
1,784

 
75

 
2,552

 
131

Total loans and leases
$
16,324

 
$
397

 
$
2,552

 
$
131



The Company’s troubled debt restructurings ("TDRs") typically involve forgiving a portion of interest or principal on existing loans, making loans at a rate materially less than current market rates, or extending the term of the loan. There were $0.7 million of Community Banking loans and $0.1 million of National Lending loans that were modified in a TDR during the three months ended June 30, 2019, all of which were modified to extend the term of the loan. No loans and leases were modified in a TDR during the three months ended June 30, 2018.


26
Table of Contents

There were $1.7 million of National Lending loans and leases and $0.7 million of Community Banking loans that were modified in a TDR during the nine months ended June 30, 2019, all of which were modified to extend the term of the loan. There were $3.8 million of Community Banking loans that were modified in a TDR during the nine months ended June 30, 2018. During the nine months ended June 30, 2019, the Company had $0.9 million of Community Banking loans that were modified in a TDR within the previous 12 months and for which there was a payment default. During the nine months ended June 30, 2018, the Company had $0.1 million of Community Banking loans that were modified in a TDR within the previous 12 months and for which there was a payment default.

At June 30, 2019, foreclosed and repossessed assets totaled $29.5 million, compared to $31.6 million at September 30, 2018. At June 30, 2019, the Company had established a valuation allowance of $0.1 million for repossessed assets. The Company did not have a valuation allowance established for any foreclosed and repossessed assets at September 30, 2018. There were no impairments on any foreclosed and repossessed assets at either date. The Company had $0.2 million of Community Banking loans in the process of foreclosure at June 30, 2019 and none at September 30, 2018.

NOTE 5. EARNINGS PER COMMON SHARE

Earnings per common share is computed after deducting any preferred dividends, if applicable. The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the earnings per share calculation. Basic earnings per common share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and after the allocation of earnings to the participating securities. Antidilutive options are disregarded in earnings per share calculations. The share and per share amounts for fiscal year 2018 have been restated to reflect the 3-for-1 forward stock split of the Company's common stock that was effected by the Company on October 4, 2018.


27
Table of Contents

A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share for the three and nine months ended June 30, 2019 and 2018 is presented below.
Three Months Ended June 30,
2019
 
2018
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Basic income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
29,291

 
$
6,792

Weighted average common shares outstanding
38,903,266

 
29,099,472

     Basic income per common share
0.75

 
0.23

 
 
 
 
Diluted income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
29,291

 
$
6,792

Weighted average common shares outstanding
38,903,266

 
29,099,472

     Outstanding options - based upon the two-class method
74,424

 
119,508

Weighted average diluted common shares outstanding
38,977,690

 
29,218,980

     Diluted income per common share
0.75

 
0.23

Nine Months Ended June 30,
2019
 
2018
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Basic income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
76,809

 
$
42,898

Weighted average common shares outstanding
39,220,793

 
29,043,309

     Basic income per common share
1.96

 
1.48

 
 
 
 
Diluted income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
76,809

 
$
42,898

Weighted average common shares outstanding
39,220,793

 
29,043,309

     Outstanding options - based upon the two-class method
68,218

 
116,676

Weighted average diluted common shares outstanding
39,289,011

 
29,159,985

     Diluted income per common share
1.95

 
1.47



NOTE 6. SECURITIES

On October 1, 2018, the Company adopted ASU 2016-01 on a prospective basis, which redefined the definition of equity securities and required their segregation from available for sale debt securities. While changes in the fair value of debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires that changes in fair value of equity securities with readily determinable fair value be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities with readily determinable fair value (recorded in accumulated other comprehensive income at September 30, 2018) was reclassified to retained earnings on October 1, 2018. The amount of the reclassification was $0.5 million, net of tax. Equity securities with readily determinable fair value include mutual funds of $1.8 million at cost and $1.9 million at fair value at June 30, 2019.

28
Table of Contents


The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale ("AFS") and held to maturity ("HTM") debt securities at June 30, 2019 and September 30, 2018 are presented below.
At June 30, 2019
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
SBA securities
$
189,816

 
$
3,271

 
$
(21
)
 
$
193,066

Obligations of states and political subdivisions
858

 
17

 
—

 
875

Non-bank qualified obligations of states and political subdivisions
459,551

 
3,456

 
(2,347
)
 
460,660

Asset-backed securities
308,711

 
753

 
(2,168
)
 
307,296

Mortgage-backed securities
395,059

 
2,838

 
(2,696
)
 
395,201

Total debt securities AFS
$
1,353,995

 
$
10,335

 
$
(7,232
)
 
$
1,357,098

Common equities and mutual funds(1)(2)
$
3,593

 
$
826

 
$
—

 
$
4,419

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at June 30, 2019.

At September 30, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
SBA securities
$
45,591

 
$
1

 
$
(1,255
)
 
$
44,337

  Obligations of states and political subdivisions
17,154

 
49

 
(293
)
 
16,910

Non-bank qualified obligations of states and political subdivisions
1,140,884

 
826

 
(31,825
)
 
1,109,885

Asset-backed securities
310,700

 
2,585

 
(257
)
 
313,028

Mortgage-backed securities
378,301

 
—

 
(14,236
)
 
364,065

Total debt securities AFS
$
1,892,630

 
$
3,461

 
$
(47,866
)
 
$
1,848,225

Common equities and mutual funds(1)
3,172

 
635

 
(7
)
 
3,800

Total AFS securities(1)
$
1,895,802

 
$
4,096

 
$
(47,873
)
 
$
1,852,025


(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.

At June 30, 2019
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities HTM
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
138,128

 
$
15

 
$
(2,500
)
 
$
135,643

Mortgage-backed securities
7,414

 
—

 
(119
)
 
7,295

Total held to maturity securities
$
145,542

 
$
15

 
$
(2,619
)
 
$
142,938


29
Table of Contents

At September 30, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities HTM
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
163,893

 
$
—

 
$
(10,758
)
 
$
153,135

Mortgage-backed securities
7,850

 
—

 
(422
)
 
7,428

Total held to maturity securities
$
171,743

 
$
—

 
$
(11,180
)
 
$
160,563



Management has implemented a process to identify securities with potential credit impairment that are other-than-temporary.  This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook of the security, monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.  To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

For all securities considered temporarily impaired, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity.  The Company believes it will collect all principal and interest due on all investments with amortized cost in excess of fair value and considered only temporarily impaired.

GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: AFS, HTM or trading. AFS securities are carried at fair value on the consolidated statements of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment. The Company had no trading securities at June 30, 2019 or September 30, 2018.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and September 30, 2018, were as follows:
 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At June 30, 2019
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
 
 
 
 
SBA securities
$
13,785

 
$
(21
)
 
$
—

 
$
—

 
$
13,785

 
$
(21
)
Obligations of states and political subdivisions
—

 
—

 
—

 
—

 
—

 
—

Non-bank qualified obligations of states and political subdivisions
—

 
—

 
230,117

 
(2,347
)
 
230,117

 
(2,347
)
Asset-backed securities
134,246

 
(1,230
)
 
62,450

 
(938
)
 
196,696

 
(2,168
)
Mortgage-backed securities
—

 
—

 
172,718

 
(2,696
)
 
172,718

 
(2,696
)
Total debt securities AFS
$
148,031

 
$
(1,251
)
 
$
465,285

 
$
(5,981
)
 
$
613,316

 
$
(7,232
)
Common equities and mutual funds(1)(2)
—

 
—

 
—

 
—

 
—

 
—

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at June 30, 2019.


30
Table of Contents

 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At September 30, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
 
 
 
 
SBA securities
$
43,097

 
$
(1,255
)
 
$
—

 
$
—

 
$
43,097

 
$
(1,255
)
Obligations of state and political subdivisions
11,036

 
(279
)
 
881

 
(14
)
 
11,917

 
(293
)
Non-bank qualified obligations of states and political subdivisions
626,693

 
(13,539
)
 
358,095

 
(18,286
)
 
984,788

 
(31,825
)
Asset-backed securities
146,638

 
(257
)
 
—

 
—

 
146,638

 
(257
)
Mortgage-backed securities
121,217

 
(3,292
)
 
242,849

 
(10,944
)
 
364,066

 
(14,236
)
Total debt securities AFS
$
948,681

 
$
(18,622
)
 
$
601,825

 
$
(29,244
)
 
$
1,550,506

 
$
(47,866
)
Common equities and mutual funds(1)
1,818

 
(7
)
 
—

 
—

 
1,818

 
(7
)
Total debt AFS securities(1)
$
950,499

 
$
(18,629
)
 
$
601,825

 
$
(29,244
)
 
$
1,552,324

 
$
(47,873
)

(1)Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.

 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At June 30, 2019
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities HTM
 
 
 
 
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
—

 
$
—

 
$
129,424

 
$
(2,500
)
 
$
129,424

 
$
(2,500
)
Mortgage-backed securities
—

 
—

 
7,295

 
(119
)
 
7,295

 
(119
)
Total held to maturity securities
$
—

 
$
—

 
$
136,719

 
$
(2,619
)
 
$
136,719

 
$
(2,619
)

 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At September 30, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities HTM
 
 
 
 
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
5,767

 
$
(287
)
 
$
147,368

 
$
(10,471
)
 
$
153,135

 
$
(10,758
)
Mortgage-backed securities
—

 
—

 
7,428

 
(422
)
 
7,428

 
(422
)
Total held to maturity securities
$
5,767

 
$
(287
)
 
$
154,796

 
$
(10,893
)
 
$
160,563

 
$
(11,180
)


At June 30, 2019, the investment portfolio included securities with current unrealized losses that have existed for longer than one year.  All of these securities are considered to be acceptable credit risks. Because (i) the declines in fair value were due to changes in market interest rates, not in estimated cash flows, (ii) the Company does not intend or has not made a decision to sell these securities and (iii) it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis, which may occur at maturity, no other-than-temporary impairment was recorded at June 30, 2019.



31
Table of Contents

The amortized cost and fair value of debt securities by contractual maturity as of the dates set forth below 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 obligations with or without call or prepayment penalties.  Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.  The expected maturities of certain housing related municipal securities, SBA and asset-backed securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
AFS Securities at Fair Value
AMORTIZED
COST
 
FAIR
VALUE
 
At June 30, 2019
(Dollars in Thousands)
 
 
 
 
Due in one year or less
$
—

 
$
—

Due after one year through five years
11,336

 
11,711

Due after five years through ten years
62,337

 
64,221

Due after ten years
885,263

 
885,965

 
958,936

 
961,897

Mortgage-backed securities
395,059

 
395,201

Total securities at fair value
$
1,353,995

 
$
1,357,098

 
AMORTIZED
COST
 
FAIR
VALUE
At September 30, 2018
(Dollars in Thousands)
 
 
 
 
Due in one year or less
$
2,532

 
$
2,529

Due after one year through five years
41,415

 
41,504

Due after five years through ten years
352,099

 
350,143

Due after ten years
1,118,283

 
1,089,984

 
1,514,329

 
1,484,160

Mortgage-backed securities
378,301

 
364,065

Common equities and mutual funds(1)
3,172

 
3,800

Total securities at fair value
$
1,895,802

 
$
1,852,025

(1)Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.

HTM Securities at Fair Value
AMORTIZED
COST
 
FAIR
VALUE
 
At June 30, 2019
(Dollars in Thousands)
 
 
 
 
Due after ten years
$
138,128

 
$
135,643

 
138,128

 
135,643

Mortgage-backed securities
7,414

 
7,295

Total held to maturity securities at cost
$
145,542

 
$
142,938


32
Table of Contents

 
AMORTIZED
COST
 
FAIR
VALUE
At September 30, 2018
(Dollars in Thousands)
Due after ten years
$
163,893

 
$
153,135

 
163,893

 
153,135

Mortgage-backed securities
7,850

 
7,428

Total held to maturity securities at cost
$
171,743

 
$
160,563



Other investments, at cost, which are included in other assets on the consolidated statement of financial condition, include equity securities without a readily determinable fair value and shares of stock in the Federal Home Loan Bank ("FHLB") of Des Moines. Equity securities without a readily determinable fair value totaled $2.5 million at June 30, 2019 and $2.0 million at September 30, 2018. FHLB of Des Moines stock at June 30, 2019 and September 30, 2018 totaled $17.2 million and $23.4 million, respectively. The decrease in FHLB stock directly correlates with lower short-term borrowings balances at June 30, 2019 compared to September 30, 2018. The Company’s wholly-owned subsidiary, MetaBank, is required by federal law to maintain FHLB stock as a member of FHLB of Des Moines. These equity securities are ‘restricted’ in that they can only be sold back to the respective institution from which they were acquired or another member institution at par. Therefore, FHLB stock is less liquid than other marketable equity securities, and the fair value approximates cost. The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value. No impairment was recognized for such investments for the nine months ended June 30, 2019.


NOTE 7. RENTAL EQUIPMENT, NET
Rental equipment was as follows as of June 30, 2019 and September 30, 2018.
 
June 30, 2019
 
September 30, 2018
 
(Dollars in thousands)
Computers and IT networking equipment
$
38,360

 
$
53,035

Motor vehicles and other
56,359

 
43,505

Office furniture and equipment
3,233

 
3,590

Solar panels and equipment
140,532

 
57,242

Total
238,484

 
157,372

 
 
 
 
Accumulated depreciation
(53,752
)
 
(50,082
)
Net book value
$
184,732

 
$
107,290


During the second quarter of fiscal year 2019, an impairment was recorded related to solar panels and equipment. Please refer to Note 3 for further discussion.
Future minimum lease payments receivable on equipment under operating leases was as follows as of June 30, 2019.
 
June 30, 2019
 
(Dollars in thousands)
Remaining in 2019
$
7,829

2020
26,938

2021
22,527

2022
15,911

2023
13,516

2024 and thereafter
28,309

Total
$
115,030



33
Table of Contents


NOTE 8. GOODWILL AND INTANGIBLE ASSETS

The Company held a total of $307.9 million of goodwill as of June 30, 2019. The recorded goodwill is a result of multiple business combinations that have occurred since fiscal year 2015, the most recent being the merger with Crestmark pursuant to the Crestmark acquisition that closed on August 1, 2018. Goodwill is assessed for impairment at a reporting unit level, which is one level below the operating segments.
 
The changes in the carrying amount of the Company’s goodwill and intangible assets for the nine months ended June 30, 2019 and 2018 were as follows:
 
Payments
 
Banking
 
Corporate Services/Other
 
Total
Goodwill
(Dollars in Thousands)
September 30, 2018
$
87,145

 
$
216,125

 
$
—

 
$
303,270

Acquisitions
—

 
—

 
—

 
—

Measurement Period Adjustments (1)
—

 
4,671

 
—

 
4,671

Impairment
—

 
—

 
—

 
—

June 30, 2019
$
87,145

 
$
220,796

 
$
—

 
$
307,941

 
 
 
 
 
 
 
 
September 30, 2017
$
87,145

 
$
11,578

 
$
—

 
$
98,723

Acquisitions
—

 
—

 
—

 
—

Impairment
—

 
—

 
—

 
—

June 30, 2018
$
87,145

 
$
11,578

 
$
—

 
$
98,723

(1) The Company recognized measurement period adjustments on provisional goodwill during the second and third fiscal quarters of 2019 related to the Crestmark acquisition. Refer to Note 3. Acquisitions.

 
Trademark(1)
 
Non-Compete(2)
 
Customer Relationships(3)
 
All Others(4)
 
Total
Intangibles
(Dollars in Thousands)
Balance as of September 30, 2018
$
12,987

 
$
1,297

 
$
48,455

 
$
7,980

 
$
70,719

Acquisitions during the period
—

 
—

 
—

 
100

 
100

Amortization during the period
(771
)
 
(353
)
 
(12,504
)
 
(724
)
 
(14,352
)
Write-offs during the period
—

 
—

 
—

 
(314
)
 
(314
)
Balance as of June 30, 2019
$
12,216

 
$
944

 
$
35,951

 
$
7,042

 
$
56,153

 
 
 
 
 
 
 
 
 
 
Gross carrying amount
$
14,624

 
$
2,480

 
$
82,088

 
$
10,688

 
$
109,880

Accumulated amortization
(2,408
)
 
(1,536
)
 
(35,889
)
 
(2,987
)
 
(42,820
)
Accumulated impairment
—

 
—

 
(10,248
)
 
(659
)
 
(10,907
)
Balance as of June 30, 2019
$
12,216

 
$
944

 
$
35,951

 
$
7,042

 
$
56,153

(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3-5 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.


34
Table of Contents

 
Trademark(1)
 
Non-Compete(2)
 
Customer Relationships(3)
 
All Others(4)
 
Total
Intangibles
(Dollars in Thousands)
Balance as of September 30, 2017
$
10,051

 
$
1,782

 
$
31,707

 
$
8,638

 
$
52,178

Acquisitions during the period
—

 
—

 
—

 
85

 
85

Amortization during the period
(477
)
 
(367
)
 
(4,548
)
 
(685
)
 
(6,077
)
Write-offs during the period
—

 
—

 
—

 
(88
)
 
(88
)
Balance as of June 30, 2018
$
9,574

 
$
1,415

 
$
27,159

 
$
7,950

 
$
46,098

 
 
 
 
 
 
 
 
 
 
Gross carrying amount
$
10,990

 
$
2,480

 
$
57,810

 
$
10,587

 
$
81,867

Accumulated amortization
(1,416
)
 
(1,065
)
 
(20,403
)
 
(2,020
)
 
(24,904
)
Accumulated impairment
—

 
—

 
(10,248
)
 
(617
)
 
(10,865
)
Balance as of June 30, 2018
$
9,574

 
$
1,415

 
$
27,159

 
$
7,950

 
$
46,098

(1) Book amortization period of 15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.

The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in the remaining three months of fiscal 2019 and subsequent fiscal years is as follows:
 
(Dollars in Thousands)
Remaining in 2019
$
3,357

2020
10,986

2021
8,527

2022
6,402

2023
5,084

2024
4,367

Thereafter
17,430

Total anticipated intangible amortization
$
56,153



The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment.  There was $0.1 million in impairments to intangible assets during the nine months ended June 30, 2019 and no impairments to intangible assets during the three months ended June 30, 2019 or the three and nine months ended June 30, 2018.

NOTE 9. STOCKHOLDERS' EQUITY
Retirement of Treasury Stock
On June 25, 2019, Meta retired $5.0 million, or 114,558 shares, of common stock held in treasury. The Company accounts for the retirement of repurchased shares, including treasury stock, using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings.
Repurchase of Common Stock
On March 26, 2019, Meta announced a share repurchase program of up to 2.0 million of its outstanding shares of common stock, or approximately 5% of its outstanding shares. The program became effective on May 1, 2019 and is scheduled to expire on September 30, 2021. During the third quarter of fiscal 2019, Meta repurchased under the program a total of $43.0 million, or 1,574,734 shares of its common stock, at an average price of $27.31 per share. Under the repurchase program, repurchased shares were retired and designated as authorized but unissued shares, and the value of the shares reduced retained earnings. As of June 30, 2019, the remaining number of shares available for repurchase under this program was 425,266 shares of common stock.

35
Table of Contents

For the nine months ended June 30, 2019, and 2018, the Company also repurchased 90,264 and 17,155 shares, or $3.0 million and $1.4 million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

NOTE 10. STOCK COMPENSATION

The Company maintains the amended and restated Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended (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 Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of the grant. The exercise price of options or fair value of non-vested (restricted) shares granted under the Company’s incentive plan is equal to the fair market value of the underlying stock at the grant date. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.

The following tables show the activity of options and nonvested (restricted) shares granted, exercised, or forfeited under the 2002 Omnibus Incentive Plan for the nine months ended June 30, 2019:
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Yrs)
 
Aggregate Intrinsic Value
 
(Dollars in Thousands, Except Per Share Data (1))
Options outstanding, September 30, 2018
155,961

 
$
8.48

 
1.78

 
$
2,974

Granted
—

 
—

 
—

 
—

Exercised
(48,678
)
 
9.07

 
—

 
802

Forfeited or expired
(3,027
)
 
10.60

 
—

 
33

Options outstanding, June 30, 2019
104,256

 
$
8.14

 
1.22

 
$
2,075

 
 
 
 
 
 
 
 
Options exercisable, June 30, 2019
104,256

 
$
8.14

 
1.22

 
$
2,075



 
Number of Shares
 
Weighted Average Fair Value at Grant
(Dollars in Thousands, Except Per Share Data (1))
Nonvested (restricted) shares outstanding, September 30, 2018
1,005,813

 
$
29.89

Granted
296,302

 
24.84

Vested
(352,218
)
 
26.77

Forfeited or expired
(2,679
)
 
26.14

Nonvested (restricted) shares outstanding, June 30, 2019
947,218

 
$
29.48

(1) All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.

At June 30, 2019, stock-based compensation expense not yet recognized in income totaled $13.5 million, which is expected to be recognized over a weighted average remaining period of 3.09 years.

NOTE 11. INCOME TAXES

The Company recorded an income tax benefit of $3.2 million for the nine months ended June 30, 2019, resulting in an effective tax rate of (4.20%), compared to an income tax expense of $12.7 million, or an effective tax rate of 22.90%, for the nine months ended June 30, 2018. The Company’s effective tax rate is lower than the U.S. statutory rate of 21% primarily because of the anticipated effect of investment tax credits during fiscal year 2019. The Company’s effective tax rate in the future will depend in part on actual investment tax credits earned as part of its financing of solar energy projects.


36
Table of Contents

The table below compares the income tax expense components for the periods presented.
Nine Months Ended June 30,
2019
 
2018
(Dollars in Thousands)
 
 
 
Provision at statutory rate
$
15,449

 
$
13,639

Tax-exempt income
(2,360
)
 
(5,506
)
State income taxes
3,243

 
2,314

Interim period effective rate adjustment
1,397

 
(1,070
)
Tax credit investments, net - federal
(22,484
)
 
—

Tax Reform rate adjustment
—

 
3,635

IRC 162(m) nondeductible compensation
1,612

 
—

Other, net
(101
)
 
(304
)
Income tax expense
$
(3,244
)
 
$
12,708

Effective tax rate
(4.2
%)
 
22.9
%


NOTE 12. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes various commitments to extend credit that are not reflected in the accompanying Consolidated Financial Statements.

At June 30, 2019 and September 30, 2018, unfunded loan commitments approximated $1.01 billion and $748.8 million, respectively, excluding undisbursed portions of loans in process. 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 Company had $1.7 million and $1.4 million in commitments to purchase securities at June 30, 2019 and September 30, 2018, respectively. The Company had no commitments to sell securities at June 30, 2019 or September 30, 2018.

The exposure to credit loss in the event of non-performance by other parties to financial 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. At June 30, 2019 and at September 30, 2018, the Company had an allowance for credit losses on off-balance sheet credit exposures of $0.1 million. This amount is maintained as a separate liability account within other liabilities.

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.

As disclosed in Note 3. Acquisitions, the Company continues to monitor the bankruptcy proceedings and federal investigations of DC Solar. As of the date of the filing of this quarterly report, the Company has not accrued for any additional loss contingencies related to DC Solar as of June 30, 2019.

37
Table of Contents


Legal Proceedings

The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank, BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County, Texas. The Plaintiff’s Second Amended Original Petition and Application for Temporary Restraining Order and Temporary Injunction added both MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager and processor for both Inter National Bank and MetaBank. The parties entered into a settlement agreement with respect to the litigation in May 2019, and the court dismissed the litigation in June 2019.

The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that after all of the programs were wound down, there were two accounts with a positive balance to which they are entitled. The Bank’s position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is entitled is $4.0 million. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.

On February 9, 2018, the Bank’s AFS/IBEX division filed a lawsuit in the United States District Court for the Eastern District of New York captioned AFS/IBEX, a division of MetaBank v. Aegis Managing Agency Limited ("AMA"), Aegis Syndicate 1225 (together with AMA, the "Aegis defendants"), CRC Insurance Services, Inc. ("CRC"), and Transportation Underwriters, Inc. The suit was filed against commercial insurance underwriters and brokers that facilitated the issuance of commercial insurance policies to Red Hook Construction Group-II, LLC (“Red Hook”). The Bank’s position is that both CRC and Transportation Underwriters represented to the Bank that, upon cancellation of the insurance policies prior to their stated terms, any unearned premiums would be refunded. The Bank then provided insurance premium financing to Red Hook, and Red Hook executed a written premium finance agreement pursuant to which Red Hook assigned its rights to any unearned premiums to the Bank. After the policies were cancelled, the Aegis defendants failed to return the unearned insurance premiums totaling just over $1.6 million owed to the Bank under the insurance policies and the premium finance agreement. The Bank is seeking recovery of all amounts to which it is entitled at law or equity and intends to vigorously pursue its claims against the defendants.

The Bank was served on December 24, 2018, with a lawsuit captioned The Ohio Valley Bank Company v. MetaBank dba Refund Advantage, Case No. 18 CV 134 in the Court of Common Pleas, Gallia County, Ohio. This action alleges that MetaBank breached a contract with The Ohio Valley Bank Company by terminating the contract before the term expired, resulting in over $3.0 million in damages. The Bank intends to vigorously defend this claim. The Company has established an accrual for this related claim.

From time to time, the Company or its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s financial position or its results of operations, legal proceedings are inherently uncertain and unfavorable resolution of some or all of these matters could, individually or in the aggregate, have a material adverse effect on the Company’s and its subsidiaries’ respective businesses, financial condition or results of operations.



38
Table of Contents

NOTE 13. REVENUE FROM CONTRACTS WITH CUSTOMERS

On October 1, 2018, the Company adopted Topic 606 on a modified retrospective basis. Prior period amounts have not been adjusted to reflect the adoption of Topic 606 and continue to be reported in accordance with the Company’s historical accounting policies. The impact of the Company’s adoption of Topic 606 was limited to the MPS division within the Payments reporting segment. Upon adoption, Meta recorded a cumulative-effect adjustment that increased retained earnings by $1.5 million, net of tax.

Topic 606 applies to all contracts with customers unless such revenue is specifically addressed under existing guidance. The table below presents the Company’s revenue by operating segment. For additional descriptions of the Company’s operating segments, including additional financial information and the underlying management accounting process, see Note 15. Segment Reporting to the Consolidated Financial Statements.
(Dollars in thousands)
Payments
 
Banking
 
Corporate Services/Other
 
Consolidated Company
Three Months Ended June 30,
2019
2018
 
2019
2018
 
2019
2018
 
2019
2018
Net interest income(1)
$
15,232

$
6,298

 
$
60,043

$
18,077

 
$
(8,307
)
$
4,036

 
$
66,968

$
28,411

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Refund transfer product fees
6,697

7,358

 
—

—

 
—

—

 
6,697

7,358

Tax advance product fees(1)
34

(46
)
 
—

—

 
—

—

 
34

(46
)
Card fees
19,445

22,717

 
92

90

 
—

—

 
19,537

22,807

Rental income(1)
4

—

 
9,382

—

 
—

—

 
9,386

—

Loan and lease fees(1)
—

—

 
1,012

1,111

 
—

—

 
1,012

1,111

Bank-owned life insurance(1)
—

—

 
—

—

 
628

633

 
628

633

Deposit fees
1,932

1,027

 
403

107

 
—

—

 
2,335

1,134

Gain (loss) on sale of securities available-for-sale, net(1)
—

—

 
—

—

 
440

(22
)
 
440

(22
)
Gain on sale of loans and leases(1)
—

—

 
1,913

—

 
—

—

 
1,913

—

Other income(1)
290

251

 
781

10

 
737

(11
)
 
1,808

250

Total noninterest income
28,402

31,307

 
13,583

1,318

 
1,805

600

 
43,790

33,225

Revenue
$
43,634

$
37,605

 
$
73,626

$
19,395

 
$
(6,502
)
$
4,636

 
$
110,758

$
61,636

(1) These revenues are not within the scope of Topic 606. Additional details are included in other footnotes to the accompanying financial statements. The scope of Topic 606 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including loans, leases, and securities.


39
Table of Contents

(Dollars in thousands)
Payments
 
Banking
 
Corporate Services/Other
 
Consolidated Company
Nine Months Ended June 30,
2019
2018
 
2019
2018
 
2019
2018
 
2019
2018
Net interest income(1)
$
38,238

$
15,900

 
$
168,107

$
49,794

 
$
(7,755
)
$
16,318

 
$
198,590

$
82,012

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Refund transfer product fees
38,559

41,353

 
—

—

 
—

—

 
38,559

41,353

Tax advance product fees(1)
34,757

35,739

 
—

—

 
—

—

 
34,757

35,739

Card fees
61,678

74,662

 
261

248

 
—

—

 
61,939

74,910

Rental income(1)
5

—

 
30,162

—

 
—

—

 
30,167

—

Loan and lease fees(1)
—

—

 
3,185

3,445

 
—

—

 
3,185

3,445

Bank-owned life insurance(1)
—

—

 
—

—

 
1,901

1,952

 
1,901

1,952

Deposit fees
5,177

2,634

 
1,188

330

 
—

—

 
6,365

2,964

Gain (loss) on sale of securities available-for-sale, net(1)
—

—

 
—

—

 
649

(1,198
)
 
649

(1,198
)
Gain on sale of loans and leases(1)
—

—

 
3,865

—

 
—

—

 
3,865

—

Loss on foreclosed real estate(1)
—

—

 
(185
)
(19
)
 
—

—

 
(185
)
(19
)
Other income(1)
804

694

 
3,323

40

 
1,236

32

 
5,363

766

Total noninterest income
140,980

155,082

 
41,799

4,044

 
3,786

786

 
186,565

159,912

Revenue
$
179,218

$
170,982

 
$
209,906

$
53,838

 
$
(3,969
)
$
17,104

 
$
385,155

$
241,924

(1) These revenues are not within the scope of Topic 606. Additional details are included in other footnotes to the accompanying financial statements. The scope of Topic 606 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including loans, leases, and securities.

Following is a discussion of key revenues within the scope of Topic 606. The Company provides services to customers that have related performance obligations that must be completed to recognize revenue. Revenues are generally recognized immediately upon the completion of the service or over time as services are performed. Any services performed over time generally require that the Company renders services each period, therefore the Company measures progress in completing these services based upon the passage of time. Revenue from contracts with customers did not generate significant contract assets and liabilities.

Refund Transfer Product Fees
Refund transfer fees are specific to the tax products offered by Refund Advantage and EPS. These fees are for products, services such as payment processing, and product referral commissions. Software partner fees paid and/or incurred are recorded on a net basis. The Company’s obligation for product fees and commissions is satisfied at the time of the product delivery and obligation for payment processing is satisfied at the time of processing. The transaction price for such activity is based upon stand-alone fees within the terms and conditions. As of June 30, 2019, there were no receivables related to refund transfer fees, which reflect earned revenue with unconditional rights to payment for product fee income, while as of September 30, 2018, there were $827,039 of such receivables. All refund transfer fees are recorded within the Payments reporting segment.

40
Table of Contents


Card Fees
Card fees relate to MPS, retail bank, Refund Advantage and EPS products. These fees are for products and services such as card activation, product support, processing, and servicing. The Company earns these fees based upon the underlying terms and conditions with each cardholder over the contract term. Agreements with the Company’s cardholders are considered daily service contracts as they are not fixed in duration. The Company’s obligation for card activation and product support fees is satisfied at the time of product delivery, while the obligation for processing and servicing is satisfied over the course of each month. The transaction price for such activity is based upon the stand-alone fees within the terms and conditions of the cardholder agreements. Card fee revenue also includes income from sponsorships, associations and networks, and interchange income. Sponsorship income relates to fees charged to the Company’s ATM sponsorship partners, where the obligation is satisfied over the course of each month. Association and network income reflect incentives, performance bonuses and rebates with MasterCard and Visa. The obligation for such income is satisfied at the time when certain thresholds of transaction volume have been met. Interchange income is generated by cardholder activity, and therefore the Company’s obligations are satisfied as activity occurs. The transaction price for such activity is based on underlying rates and activity thresholds within the terms and conditions of the applicable agreements. Card fee revenue also includes breakage revenue. Breakage represents the estimated amount that will not be redeemed by the holder of unregistered, unused prepaid cards for goods or services. Breakage revenue is recognized ratably over the expected customer usage period and is an estimate based on cardholder behavior and breakage rates. Breakage is also impacted by escheatment laws. Card fees are recorded within the Payments and Banking reporting segments.

Deposit Fees
Fees are earned on depository accounts for commercial and consumer customers and include fees for account services, overdraft services, safety deposit box rentals, and event-driven services (i.e. returned checks, ATM surcharge, card replacement, wire transfers, and stop pays). The Company’s obligation for event-driven services is satisfied at the time of the event when the service is delivered, while its obligation for account services is satisfied over the course of each month. The Company’s obligation for overdraft services is satisfied at the time of overdraft. The transaction price for such activity is based upon stand-alone fees within the terms and conditions of the deposit agreements. Deposit fees are recorded within the Payments and Banking reporting segment.

Principal vs Agent
The Payments reporting segment includes principal/agent relationships. Within this segment, MPS relationships are recorded on a gross basis within the income statement, as Meta is the principal in the contract, with the exception of association/network contracts and partner/processer contracts for prepaid cards, which are recorded on a net basis within the income statement as Meta is the agent in these contracts. Also within this segment, Tax service relationships are recorded on a gross basis within the income statement, as Meta is the principal in the contract, with the exception of contracts with software providers and merchants, which are recorded on a net basis within the income statement as Meta is the agent in these contracts.



41
Table of Contents

NOTE 14. FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement.  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 transaction between market participants in the market in which the reporting entity transacts.

The fair value hierarchy is as follows:

Level 1 Inputs - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.

Level 2 Inputs - Valuation is based upon (1) quoted prices for similar instruments in active markets, (2) quoted prices for identical or similar instruments in markets that are not active and (3) model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 Inputs - Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Debt Securities Available for Sale and Equity Securities. Debt securities available for sale and equity securities are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The Company’s Level 1 securities include equity securities and mutual funds. Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds and corporate debt securities.  The Company had no Level 3 securities at June 30, 2019 or September 30, 2018.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or valuation based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which significant assumptions are observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third party provider which utilizes several sources for valuing fixed-income securities. These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology, and the third party provider’s own matrix and desk pricing.  The Company, no less than annually, reviews the third party’s methods and source’s methodology for reasonableness and to ensure an understanding of inputs utilized in determining fair value. Sources utilized by the third party provider include but are not limited to pricing models that vary based by asset class and include available trade, bid, and other market information. This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. Monthly, the Company receives and compares prices provided by multiple securities dealers and pricing providers to validate the accuracy and reasonableness of prices received from the third party provider. On a monthly basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.
 

42
Table of Contents

The following table summarizes the fair values of debt securities available for sale and equity securities at June 30, 2019 and September 30, 2018, as they are measured at fair value on a recurring basis.
 
Fair Value At June 30, 2019
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Debt securities AFS
 
 
 
 
 
 
 
SBA securities
$
193,066

 
$
—

 
$
193,066

 
$
—

Obligations of states and political subdivisions
875

 
—

 
875

 
—

Non-bank qualified obligations of states and political subdivisions
460,660

 
—

 
460,660

 
—

Asset-backed securities
307,296

 
—

 
307,296

 
—

Mortgage-backed securities
395,201

 
—

 
395,201

 
—

Total debt securities AFS
$
1,357,098

 
$
—

 
$
1,357,098

 
$
—

Common equities and mutual funds(1)(2)
$
4,419

 
$
4,419

 
$
—

 
$
—

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at June 30, 2019.
 
Fair Value At September 30, 2018
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Debt securities AFS
 
 
 
 
 
 
 
SBA securities
$
44,337

 
$
—

 
$
44,337

 
$
—

Obligations of states and political subdivisions
16,910

 
—

 
16,910

 
—

Non-bank qualified obligations of states and political subdivisions
1,109,885

 
—

 
1,109,885

 
—

Asset-backed securities
313,028

 
—

 
313,028

 
—

Mortgage-backed securities
364,065

 
—

 
364,065

 
—

Total debt securities AFS
1,848,225

 
—

 
1,848,225

 
—

Common equities and mutual funds(1)
3,800

 
3,800

 
—

 
—

Total securities
$
1,852,025

 
$
3,800

 
$
1,848,225

 
$
—


(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.

The Company did not transfer any AFS debt securities or equity securities between fair value hierarchy categories at June 30, 2019 or September 30, 2018.

Loans and Leases.  The Company does not record loans and leases at fair value on a recurring basis.  If a loan or lease is identified as individually impaired, management then measures impairment in accordance with ASC 310, Receivables. See Note 4 Loans and Leases, Net for further information.

The following table summarizes the assets of the Company that were measured at fair value in the consolidated statements of financial condition on a non-recurring basis as of June 30, 2019 and September 30, 2018.
 
Fair Value At June 30, 2019
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Impaired Loans and Leases, net
 
 
 
 
 
 
 
Asset based lending
$
83

 
$
—

 
$
—

 
$
83

Factoring
3,960

 
—

 
—

 
3,960

Commercial finance
4,043

 
—

 
—

 
4,043

Total National Lending
4,043

 
—

 
—

 
4,043

     Total impaired loans and leases
4,043

 
—

 
—

 
4,043

Foreclosed assets, net
29,514

 
—

 
—

 
29,514

Total
$
33,557

 
$
—

 
$
—

 
$
33,557



43
Table of Contents

 
Fair Value At September 30, 2018
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Impaired loans and leases, net
 
 
 
 
 
 
 
Asset based lending
$
57

 
$
—

 
$
—

 
$
57

Factoring
1,899

 
—

 
—

 
1,899

Lease financing
2,869

 
—

 
—

 
2,869

Commercial finance
4,825

 
—

 
—

 
4,825

Total National Lending
4,825

 
—

 
—

 
4,825

     Total impaired loans and leases
4,825

 
—

 
—

 
4,825

Foreclosed assets, net
31,638

 
—

 
—

 
31,638

Total
$
36,463

 
$
—

 
$
—

 
$
36,463


 
Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)
Fair Value at
June 30, 2019
 
Fair Value at
September 30, 2018
 
Valuation
Technique
 
Unobservable Input
 
Range of Inputs
Impaired loans and leases, net
$
4,043

 
4,825

 
Market approach
 
Appraised values(1)
 
4.00 - 10.00%
Foreclosed assets, net
$
29,514

 
31,638

 
Market approach
 
Appraised values(1)
 
4.00 - 30.00%
(1) The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs and other inputs in a range of 4% to 30%.

The following table discloses the Company’s estimated fair value amounts of its financial instruments as of the dates set forth below.  It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of June 30, 2019 and September 30, 2018, 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 substantially different when actually recognized over time through the normal course of operations.  Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value.  Neither of these components have been given consideration in the presentation of fair values below.


44
Table of Contents

The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at June 30, 2019 and September 30, 2018.
 
June 30, 2019
(Dollars in Thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
100,732

 
$
100,732

 
$
100,732

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Debt securities available for sale
1,357,098

 
1,357,098

 
—

 
1,357,098

 
—

Debt securities held to maturity
145,542

 
142,938

 
—

 
142,938

 
—

Equity securities(1)
4,419

 
4,419

 
4,419

 
—

 
—

Total securities
1,507,059

 
1,504,455

 
4,419

 
1,500,036

 
—

 
 
 
 
 
 
 
 
 
 
Loans held for sale
62,839

 
62,839

 
—

 
62,839

 
—

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Asset based lending
615,309

 
599,664

 
—

 
—

 
599,664

Factoring
320,344

 
316,278

 
—

 
—

 
316,278

Lease financing
341,957

 
338,804

 
—

 
—

 
338,804

Insurance premium finance
358,772

 
358,401

 
—

 
—

 
358,401

SBA/USDA
99,791

 
94,391

 
—

 
—

 
94,391

Other commercial finance
99,677

 
101,145

 
—

 
—

 
101,145

Commercial finance
1,835,850

 
1,808,683

 
—

 
—

 
1,808,683

Consumer credit products
155,539

 
156,539

 
—

 
—

 
156,539

Other consumer finance
164,727

 
160,239

 
—

 
—

 
160,239

Consumer finance
320,266

 
316,778

 
—

 
—

 
316,778

Tax services
24,410

 
8,985

 
—

 
—

 
8,985

Warehouse finance
250,003

 
250,053

 
—

 
—

 
250,053

Total National Lending
2,430,529

 
2,384,499

 
—

 
—

 
2,384,499

Commercial real estate and operating
877,412

 
867,725

 
—

 
—

 
867,725

Consumer one to four family real estate and other
256,853

 
258,359

 
—

 
—

 
258,359

Agricultural real estate and operating
61,169

 
59,270

 
—

 
—

 
59,270

Total Community Banking
1,195,434

 
1,185,354

 
—

 
—

 
1,185,354

Total loans and leases
3,625,963

 
3,569,853

 
—

 
—

 
3,569,853

 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank stock
17,236

 
17,236

 
—

 
17,236

 
—

Accrued interest receivable
19,722

 
19,722

 
19,722

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
2,751,931

 
2,751,931

 
2,751,931

 
—

 
—

Interest-bearing demand deposits, savings, and money markets
278,585

 
278,585

 
278,585

 
—

 
—

Time certificates of deposits
116,698

 
116,657

 
—

 
116,657

 
—

Wholesale non-maturing deposits
216,598

 
216,598

 
216,598

 
—

 
—

Wholesale time certificates of deposits
1,411,402

 
1,412,931

 
—

 
1,412,931

 
—

Total deposits
4,775,214

 
4,776,702

 
3,247,114

 
1,529,588

 
—

 
 
 
 
 
 
 
 
 
 
Overnight federal funds purchased
135,000

 
135,000

 
135,000

 
—

 
—

Long-term Federal Home Loan Bank advances
110,000

 
110,578

 
—

 
110,578

 
—

Securities sold under agreements to repurchase
3,658

 
3,658

 
—

 
3,658

 
—

Capital leases
1,972

 
1,972

 
—

 
1,972

 
—

Trust preferred securities
13,661

 
13,879

 
—

 
13,879

 
—

Subordinated debentures
73,605

 
76,875

 
—

 
76,875

 
—

Other borrowings
18,482

 
18,307

 
—

 
18,307

 
—

Accrued interest payable
12,350

 
12,350

 
12,350

 
—

 
—

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at June 30, 2019 and September 30, 2018.

45
Table of Contents

 
September 30, 2018
(Dollars in Thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
99,977

 
$
99,977

 
$
99,977

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Securities available for sale
1,852,025

 
1,852,025

 
3,800

 
1,848,225

 
—

Securities held to maturity
172,154

 
160,974

 
—

 
160,974

 
—

Total securities
2,024,179

 
2,012,999

 
3,800

 
2,009,199

 
—

 
 
 
 
 
 
 
 
 
 
Loans held for sale
15,606

 
15,606

 
—

 
15,606

 
—

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Asset based lending
477,917

 
477,471

 
—

 
—

 
477,471

Factoring
284,221

 
283,424

 
—

 
—

 
283,424

Lease financing
265,315

 
264,679

 
—

 
—

 
264,679

Insurance premium finance
337,877

 
337,212

 
—

 
—

 
337,212

SBA/USDA
59,374

 
61,072

 
—

 
—

 
61,072

Other commercial finance
85,145

 
83,111

 
—

 
—

 
83,111

Commercial finance
1,509,849

 
1,506,969

 
—

 
—

 
1,506,969

Consumer credit products
80,605

 
80,633

 
—

 
—

 
80,633

Other consumer finance
189,756

 
197,320

 
—

 
—

 
197,320

Consumer finance
270,361

 
277,953

 
—

 
—

 
277,953

Tax services
1,073

 
1,073

 
—

 
—

 
1,073

Warehouse finance
65,000

 
64,978

 
—

 
—

 
64,978

Total National Lending
1,846,283

 
1,850,973

 
—

 
—

 
1,850,973

Commercial real estate and operating
790,890

 
773,203

 
—

 
—

 
773,203

Consumer one to four family real estate and other
247,318

 
244,730

 
—

 
—

 
244,730

Agricultural real estate and operating
60,498

 
58,849

 
—

 
—

 
58,849

Total Community Banking
1,098,706

 
1,076,782

 
—

 
—

 
1,076,782

Total loans and leases
2,944,989

 
2,927,755

 
—

 
—

 
2,927,755

 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank stock
23,400

 
23,400

 
—

 
23,400

 
—

Accrued interest receivable
22,016

 
22,016

 
22,016

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
2,405,274

 
2,405,274

 
2,405,274

 
—

 
—

Interest-bearing demand deposits, savings, and money markets
218,347

 
218,347

 
218,347

 
—

 
—

Time certificates of deposits
276,180

 
273,800

 
—

 
273,800

 
—

Wholesale non-maturing deposits
94,384

 
94,384

 
94,384

 
—

 
—

Wholesale time certificates of deposits
1,436,802

 
1,432,146

 
—

 
1,432,146

 
—

Total deposits
4,430,987

 
4,423,951

 
2,718,005

 
1,705,946

 
—

 
 
 
 
 
 
 
 
 
 
Overnight federal funds purchased
422,000

 
422,000

 
422,000

 
—

 
—

Securities sold under agreements to repurchase
3,694

 
3,694

 
—

 
3,694

 
—

Capital leases
1,876

 
1,876

 
—

 
1,876

 
—

Trust preferred securities
13,661

 
13,866

 
—

 
13,866

 
—

Subordinated debentures
73,491

 
75,563

 
—

 
75,563

 
—

Accrued interest payable
7,794

 
7,794

 
7,794

 
—

 
—




46
Table of Contents



The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at June 30, 2019 and September 30, 2018.
 
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
 
DEBT SECURITIES AVAILABLE FOR SALE AND EQUITY SECURITIES
Debt securities available for sale and equity securities are recorded at fair value on a recurring basis. Fair values for these investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.

LOANS HELD FOR SALE
The carrying amount of loans held for sale is assumed to approximate the fair value.

LOANS AND LEASES, NET
Upon adoption of ASU 2016-01, the fair value of loans and leases were estimated using an exit price methodology. The exit price estimation of fair value is based on the present value of expected cash flows, which are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk. In comparison, loan and lease fair values as of September 30, 2018 were estimated on an entrance price methodology, which discounts future cash flows using the then-current rates at which a similar loan would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of non-impaired loans and leases as of June 30, 2019 and September 30, 2018 are not comparable.

FEDERAL HOME LOAN BANK (“FHLB”) STOCK
The fair value of FHLB stock is assumed to approximate book value since the Company is only 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 noninterest-bearing checking deposits, interest-bearing checking deposits, savings, money markets, and wholesale non-maturing deposits are assumed to approximate fair value since deposits are immediately withdrawable without penalty. The fair value of time certificate deposits and wholesale certificate deposits are estimated using a discounted cash flows calculation that applies the FHLB Des Moines curve to aggregated expected maturities of time deposits. In accordance with Subtopic 825-10, Financial Instruments, 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 Subtopic 825-10.
 
ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.
 
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
 
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, SUBORDINATED DEBENTURES AND OTHER BORROWINGS
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.
 
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
 

47
Table of Contents

LIMITATIONS
Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instrument.  Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments.  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 experience, 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.

NOTE 15. 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. Operating segments are aggregated into reportable segments if certain criteria are met.

The Company reports its results of operations through the following three business segments: Payments, Banking, and Corporate Services/Other. The Meta Payment Systems and Tax Services divisions are reported in the Payments segment. The Community Banking, Commercial Finance and Consumer Finance divisions are reported in the Banking segment. Certain shared services, including the investment portfolio, wholesale deposits and borrowings, are included in the Corporate Services/Other segment.

The following tables present segment data for the Company for the three and nine months ended June 30, 2019 and 2018, respectively.
 
Payments
 
Banking
 
Corporate
Services/Other
 
Total
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
Net interest income (expense)
$
15,232

 
$
60,043

 
$
(8,307
)
 
$
66,968

Provision for loan and lease losses
914

 
8,198

 
—

 
9,112

Noninterest income
28,402

 
13,583

 
1,805

 
43,790

Noninterest expense
17,559

 
33,233

 
21,676

 
72,468

Income (loss) before income tax expense (benefit)
25,161

 
32,195

 
(28,178
)
 
29,178

 
 
 
 
 
 
 
 
Total assets
196,257

 
4,169,351

 
1,735,464

 
6,101,072

Total goodwill
87,145

 
220,796

 
—

 
307,941

Total deposits
2,795,009

 
297,861

 
1,682,344

 
4,775,214

 
Payments
 
Banking
 
Corporate
Services/Other
 
Total
Nine Months Ended June 30, 2019
 
 
 
 
 
 
 
Net interest income (expense)
$
38,238

 
$
168,107

 
$
(7,755
)
 
$
198,590

Provision for loan and lease losses
24,883

 
26,646

 
—

 
51,529

Noninterest income
140,980

 
41,799

 
3,786

 
186,565

Noninterest expense
71,098

 
109,598

 
76,320

 
257,016

Income (loss) before income tax expense (benefit)
83,237

 
73,662

 
(80,289
)
 
76,610

 
 
 
 
 
 
 
 
Total assets
196,257

 
4,169,351

 
1,735,464

 
6,101,072

Total goodwill
87,145

 
220,796

 
—

 
307,941

Total deposits
2,795,009

 
297,861

 
1,682,344

 
4,775,214


48
Table of Contents

 
Payments
 
Banking
 
Corporate
Services/Other
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
Net interest income
$
6,298

 
$
18,077

 
$
4,036

 
$
28,411

Provision for loan losses
1,189

 
4,126

 
—

 
5,315

Noninterest income
31,307

 
1,318

 
600

 
33,225

Noninterest expense
27,796

 
7,172

 
14,085

 
49,053

Income (loss) before income tax expense (benefit)
8,620

 
8,097

 
(9,449
)
 
7,268

 
 
 
 
 
 
 
 
Total assets
190,437

 
1,623,715

 
2,355,007

 
4,169,159

Total goodwill
87,145

 
11,578

 
—

 
98,723

Total deposits
2,641,838

 
241,572

 
638,223

 
3,521,633

 
Payments
 
Banking
 
Corporate
Services/Other
 
Total
Nine Months Ended June 30, 2018
 
 
 
 
 
 
 
Net interest income
$
15,900

 
$
49,794

 
$
16,318

 
$
82,012

Provision for loan losses
20,335

 
4,391

 
—

 
24,726

Noninterest income
155,082

 
4,044

 
786

 
159,912

Noninterest expense
99,592

 
20,723

 
41,277

 
161,592

Income (loss) before income tax expense (benefit)
51,055

 
28,724

 
(24,173
)
 
55,606

 
 
 
 
 
 
 
 
Total assets
190,437

 
1,623,715

 
2,355,007

 
4,169,159

Total goodwill
87,145

 
11,578

 
—

 
98,723

Total deposits
2,641,838

 
241,572

 
638,223

 
3,521,633



NOTE 16. SUBSEQUENT EVENTS

Management has evaluated subsequent events that occurred after June 30, 2019. During this period, up to the filing date, management did not identify any material subsequent events that would require recognition or disclosure in our consolidated financial statements as of or for the quarter ended June 30, 2019.


49
Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

META FINANCIAL GROUP, INC®.
AND SUBSIDIARIES
 
FORWARD LOOKING STATEMENTS
 
Meta Financial Group, Inc.®, (“Meta” or “the Company” or “us”) and its wholly-owned subsidiary, MetaBank® (the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, in the Company's other filings with the Securities and Exchange Commission (“SEC”), in its reports to stockholders, and in other communications by the Company and the Bank, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements may address, among others, the following subjects: future operating results; our ability to remediate the material weakness in our internal controls over financial reporting and otherwise maintain effective internal controls over financial reporting; customer retention; loan and other product demand; important components of the Company's statements of financial condition and operations; growth and expansion; new products and services, such as those offered by MetaBank or the Company's Payments divisions (which include Meta Payment Systems, Refund Advantage, EPS Financial and Specialty Consumer Services); credit quality and adequacy of reserves; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; the expected growth opportunities, beneficial synergies and/or operating efficiencies from the Crestmark acquisition may not be fully realized or may take longer to realize than expected; customer losses and business disruption related to the Crestmark acquisition; unanticipated or unknown losses and liabilities may be incurred by the Company following the Crestmark acquisition; the costs, risks and effects on the Company of the ongoing federal investigation and bankruptcy proceedings involving DC Solar Solutions, Inc., DC Solar Distribution, Inc., and their affiliates, including the potential financial impact of those matters on the net book value of Company assets leased to DC Solar Distribution and the Company’s ability to recognize certain investment tax credits associated with such assets, and the results of the Company’s review of its due diligence processes with respect to the Company’s alternative energy assets; factors relating to the Company’s share repurchase program; actual changes in interest rates and the Fed Funds rate; additional changes in tax laws; the strength of the United States' economy, in general, and the strength of the local economies in which the Company conducts operations; risks relating to the recent U.S. government shutdown and any potential future government shutdown, including any adverse impact on our ability to originate or sell SBA/USDA loans and any delay by the Internal Revenue Service in processing taxpayer refunds, thereby increasing the cost to us of our refund advance loans; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), as well as efforts of the United States Congress and the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, market, and monetary fluctuations; the timely and efficient development of, and acceptance of, new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third parties, including, in connection with the Company’s refund advance business, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or acceptance of usage of Meta’s strategic partners’ refund advance products; any actions which may be initiated by our regulators in the future; the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry; our relationship with our primary regulators, the Office of the Comptroller of the Currency and the Federal Reserve, as well as the Federal Deposit Insurance Corporation, which insures MetaBank’s deposit accounts up to applicable limits; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk, in general, including, but not limited to, those risks involving MetaBank's divisions; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by MetaBank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion of which has been characterized as “brokered;” changes in consumer spending and saving habits; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive.  We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report speak only as of the date hereof.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  Additional discussions of factors affecting the Company’s business and prospects are included under the caption "Risk Factors" and in other sections of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018 and in other filings made with the SEC.  The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances or future events or for any other reason.

50
Table of Contents

GENERAL
 
The Company, a registered unitary savings and loan holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank.  Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis.
 
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.”
 
The following discussion focuses on the consolidated financial condition of the Company at June 30, 2019, compared to September 30, 2018, and the consolidated results of operations for the three and nine months ended June 30, 2019 and 2018.  This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2018 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

EXECUTIVE SUMMARY

In January 2019, the Company announced three key elements to its near-term plan that management expects will enhance long-term value for shareholders. The three key initiatives within the plan are as follows:

1) Increase the percentage of balance sheet funding from core deposits;

2) Optimize the interest-earning asset mix of the balance sheet; and

3) Improve operating efficiencies.

The Company recorded net income of $29.3 million, or $0.75 per diluted share, for the quarter ended June 30, 2019, comparing favorably to net income of $6.8 million, or $0.23 per diluted share, that was recorded for the fiscal 2018 third quarter. Total revenue for the fiscal 2019 third quarter was $110.8 million, compared to $61.6 million for the same quarter in fiscal 2018, an increase of 80%. The improvement in revenue and net income was driven primarily by the Company's improved earning asset mix in connection with the acquisition of Crestmark in the fourth quarter of fiscal 2018.

The continued growth in loans and leases during the third quarter of fiscal 2019, along with the continued optimization of the earning asset mix of the balance sheet, led to net interest income of $67.0 million and net interest margin ("NIM") of 5.07% and net interest margin, tax-equivalent ("NIM, TE") of 5.15%. The Company's average gross loans and leases increased by $2.04 billion, or 131%, while average noninterest-bearing deposits increased by $244.5 million, or 10%, when compared to the same period in fiscal 2018. Management anticipates that NIM will continue to expand over time as the Company continues to grow and optimize the loan and lease portfolio along with leveraging growth from its Payments division's low-cost deposits.

Noninterest income for the quarter ended June 30, 2019 increased to $43.8 million. Contributing to the increase were increases in rental income, gain on sale of loans and leases, other income, and deposit fees. For the quarter ended June 30, 2019, noninterest expense was $72.5 million. The increase in noninterest expense over the prior year fiscal third quarter was primarily due to the addition of the Crestmark division as a result of the Crestmark acquisition, which was not present in the comparable quarter in the prior fiscal year.

The Company announced during the second quarter of fiscal 2019 that its Board of Directors authorized a share repurchase program to repurchase up to 2,000,000 shares of the Company's outstanding common stock. During the third quarter of fiscal 2019, the Company repurchased 1,574,734 shares under the share repurchase program at an average price of $27.31, for a total of $43.0 million. The program became effective May 1, 2019 and is scheduled to expire on September 30, 2021.


51
Table of Contents

FINANCIAL CONDITION
 
At June 30, 2019, the Company’s total assets increased by $266.0 million, or 5%, to $6.10 billion compared to $5.84 billion at September 30, 2018, primarily due to an increase in loans and leases, while partially being offset by a decrease in the investment portfolio.

Total cash and cash equivalents was $100.7 million at June 30, 2019, an increase of 1%, from $100.0 million at September 30, 2018. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the Federal Reserve Bank.

The total investment portfolio decreased $517.3 million, or 26%, to $1.50 billion at June 30, 2019, compared to $2.02 billion at September 30, 2018, as maturities, sales, and principal pay downs exceeded purchases. The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions (“NBQ”), which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. All MBS held by the Company at June 30, 2019 were issued by a U.S. Government agency or instrumentality. Of the total MBS, $395.2 million, at fair value, were classified as available for sale, and $7.4 million, at cost, were classified as held to maturity. Of the total investment securities, $961.9 million, at fair value, were classified as available for sale and $138.1 million, at cost, were classified as held to maturity. During the nine-month period ended June 30, 2019, the Company purchased $297.5 million of investment securities available for sale and no investment securities held to maturity or MBS securities.

The Company’s portfolio of gross loans and leases increased by $681.0 million, or 23%, to $3.63 billion at June 30, 2019, from $2.94 billion at September 30, 2018.

National Lending loans and leases increased $584.2 million, or 32% to $2.43 billion at June 30, 2019 compared to September 30, 2018. Within the National Lending portfolios, commercial finance loans and leases increased $326.0 million, warehouse finance portfolio increased $185.0 million, consumer finance portfolio increased $49.9 million, and the tax services loans increased $23.3 million at June 30, 2019 compared to September 30, 2018. Community Banking loans grew $96.7 million, or 9%, at June 30, 2019 compared to September 30, 2018, primarily due to growth in commercial real estate loans.

As of June 30, 2019, the remaining balance of acquired loans and leases from the Crestmark acquisition was $402.4 million and the remaining balances of the credit and interest rate mark discounts related to the acquired loans and leases held for investment were $6.8 million and $3.2 million, respectively, while the remaining balance of the interest rate mark premium related to the acquired loans held for sale was $0.7 million. On August 1, 2018, the Company acquired loans and leases from the Crestmark acquisition totaling $1.06 billion and recorded related credit and interest rate mark discounts of $12.3 million and $6.0 million, respectively.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking
system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in such stock decreased $6.2 million, or 26%, to $17.2 million at June 30, 2019, from $23.4 million at September 30, 2018. The decrease in FHLB stock directly correlates with lower short-term borrowings balances at June 30, 2019 compared to September 30, 2018.

Total end-of-period deposits increased $344.2 million, or 8%, at June 30, 2019 to $4.78 billion as compared to September 30, 2018, primarily related to increases of $346.7 million in noninterest-bearing deposits, $96.8 million in wholesale deposits and $46.2 million in interest-bearing checking deposits. The increase in total deposits was partially offset by a decrease of $159.5 million in certificates of deposit.

The average balance of total deposits and interest-bearing liabilities was $5.37 billion for the nine-month period ended June 30, 2019, compared to $3.83 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the nine-month period ended June 30, 2019 increased by $233.6 million, or 9%, to $2.72 billion compared to the same period in the prior year.
 

52
Table of Contents

The Company's total borrowings decreased $158.3 million, or 31%, from $514.7 million at September 30, 2018 to $356.4 million at June 30, 2019, primarily due to a decrease in short-term borrowings. During the third quarter of fiscal 2019, the Company replaced a portion of its short-term borrowings with new long-term borrowings of $110.0 million. The Company’s short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base, primarily related to payroll processing timing with a higher volume of short-term borrowings on Monday and Tuesday, which are typically paid down throughout the week. This predictable fluctuation may be augmented near a month-end by a prefunding of certain programs. The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at June 30, 2019.

At June 30, 2019, the Company’s stockholders’ equity totaled $822.9 million, an increase of $75.2 million, from $747.7 million at September 30, 2018.  The increase was attributable to net earnings, an increase in additional paid-in capital and a change in accumulated other comprehensive income. At June 30, 2019, the Bank continued to exceed all regulatory requirements for classification as a well‑capitalized institution.  See “Liquidity and Capital Resources” for further information.

Non-performing Assets and Allowance for Loan and Lease Losses

Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful.

Loans and leases, or portions thereof, are charged off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired.
 
The Company believes that the level of allowance for loan and lease losses at June 30, 2019 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See “Allowance for Loan and Lease Losses” below.
 

53
Table of Contents

The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.
 
Non-Performing Assets As Of
 
June 30, 2019
 
September 30, 2018
 
(Dollars in Thousands)
Non-performing loans and leases
 
 
 
Non-accruing loans and leases:
 
 
 
Asset based lending
$
5,654

 
$
—

Factoring
4,846

 
—

Lease financing
1,936

 
2,864

SBA/USDA
259

 
—

Commercial finance
12,695

 
2,864

Total National Lending
12,695

 
2,864

Consumer one-to-four family real estate and other
233

 
—

Total Community Banking
233

 
—

Total
12,928

 
2,864

 
 
 
 
Accruing loans and leases delinquent 90 days or more:
 
 
 

Asset based lending
180

 
94

Lease financing
4,225

 
726

Insurance premium finance
1,679

 
2,981

Commercial finance
6,084

 
3,801

Consumer credit products
703

 
147

Other consumer finance
1,083

 
2,237

Consumer finance
1,786

 
2,384

Tax services
—

 
1,073

Total National Lending
7,870

 
7,258

Consumer one-to-four family real estate and other
—

 
79

Total Community Banking
—

 
79

Total
7,870

 
7,337

 
 
 
 
Total non-performing loans and leases
20,798

 
10,201

 
 
 
 
Other assets
 
 
 

Non-performing operating leases
703

 
—

 
 
 
 
Foreclosed and repossessed assets:
 
 
 

Commercial finance
1,392

 
1,626

Consumer one-to-four family real estate and other
—

 
90

Agricultural real estate and operating
28,122

 
29,922

Total
29,514

 
31,638

 
 
 
 
Total other assets
30,217

 
31,638

 
 
 
 
Total non-performing assets
$
51,015

 
$
41,839

Total as a percentage of total assets
0.84
%
 
0.72
%
 

At June 30, 2019, non-performing loans and leases totaled $20.8 million, representing 0.57% of total loans and leases, compared to $10.2 million, or 0.35% of total loans and leases at September 30, 2018.


54
Table of Contents

Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

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.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2019, the Company had classified $35.0 million of its assets as substandard and did not classify any assets as doubtful or loss. At September 30, 2018, the Company classified $24.6 million of its assets as substandard and did not classify any assets as doubtful or loss.
 
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan and lease losses based on management’s evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan and lease losses. The current economic environment continues to show signs of stability in the Bank’s markets. The Bank’s average loss rates over the past three years were low relative to industry averages for such years, offset, in the case of fiscal 2016, with a higher agricultural loss rate driven by the charge-off of one relationship. The Bank does not believe it is likely these low loss conditions will continue indefinitely. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors, in order to determine the amount of risk the Company believes exists within that segment.

Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the allowance for loan and lease losses at June 30, 2019 reflected an appropriate allowance against probable losses from the lending portfolio. Although the Company maintains its allowance for loan and lease losses at a level it considers to be appropriate, 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 and lease losses will not be required in future periods. In addition, the Company’s determination of the allowance for loan and lease losses is subject to review by the OCC, which can require the establishment of additional general or specific allowances.

At June 30, 2019, the Company had established an allowance for loan and lease losses totaling $43.5 million, compared to $13.0 million at September 30, 2018. The increase in the Company's allowance for loan and lease losses was driven primarily by increases in the allowance of $15.4 million in tax services loans, $11.0 million in the commercial finance portfolio, and $3.5 million in consumer finance loans. The change in the tax services portfolio was driven by additional provision expense related to loan originations by the Company's tax services division. Growth in the commercial finance portfolio was largely attributable to the Crestmark division while the increase in consumer finance is related to the Company now taking on all of the risk of the student loan portfolio, as the portfolio is no longer insured.


55
Table of Contents

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the allowance for loan and lease losses, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended September 30, 2018. There were no significant changes to these critical accounting policies and estimates during the first nine months of fiscal year 2019.

RESULTS OF OPERATIONS
 
General. The Company recorded net income of $29.3 million, or $0.75 per diluted share, for the three months ended June 30, 2019, compared to net income of $6.8 million, or $0.23 per diluted share, for the three months ended June 30, 2018. Total revenue for the fiscal 2019 third quarter was $110.8 million, compared to $61.6 million for the same quarter in fiscal 2018, an increase of 80%. The increase in net income and revenue was primarily due to the improvement in net interest income, attributable to the acquisition of Crestmark in the fourth quarter of fiscal 2018, along with an enhanced interest-earning asset mix.

The Company recorded net income of $76.8 million, or $1.95 per diluted share, for the nine months ended June 30, 2019, compared to $42.9 million, or $1.47 per diluted share, for the same period in fiscal year 2018. Total revenue for the nine months ended June 30, 2019 was $385.2 million, compared to $241.9 million for the same period of the prior year, an increase of 59%.

Net Interest Income.  Net interest income for the fiscal 2019 third quarter increased by $38.6 million, or 136%, to $67.0 million from $28.4 million for the same quarter in fiscal 2018, primarily due to growth in loan and lease balances as well as an increase in loan and lease yields. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the quarter ended June 30, 2019 increased to 68%, from 40% for the quarter ended June 30, 2018, while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 31% from 58% over that same period.
 
For the nine months ended June 30, 2019, net interest income was $198.6 million compared to $82.0 million for the same period in the prior year. This increase was primarily due to an enhanced interest-earning asset mix related to the acquired loans and leases in the Crestmark division, along with continued growth in the National Lending and Community Banking loan and lease portfolios.

Net interest margin was 5.07% in the fiscal 2019 third quarter, an increase of 213 basis points from 2.94% in the fiscal 2018 third quarter. NIM,TE was 5.15% in the fiscal 2019 third quarter, an increase of 192 basis points from 3.23% in the fiscal 2018 third quarter. The increases in NIM and NIM, TE in the fiscal 2019 third quarter, compared to the same period of the prior year, were primarily attributable to higher net loan and lease yields attained through the Crestmark division.

For the nine months ended June 30, 2019, NIM was 4.90%, increasing 213 basis points from 2.77% during the comparable prior year period. NIM, TE for the nine months ended June 30, 2019 was 5.02%, an increase of 196 basis points for the same period of the prior year.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased by 244 basis points to 6.26% when comparing the fiscal 2019 third quarter to the same period of the prior fiscal year. The improvement was driven primarily by the Company's improved earning asset mix, which reflects increased balances in the National Lending portfolio. The fiscal 2019 third quarter TEY on the securities portfolio decreased by two basis points to 3.09% compared to the same period of the prior year TEY of 3.11%.


56
Table of Contents

The Company’s average interest-earning assets for the fiscal 2019 third quarter increased by $1.43 billion, or 37%, to $5.30 billion, from the comparable quarter in 2018. The increase was primarily attributable to growth in the Company's average loan and lease portfolio of $2.04 billion, of which $1.88 billion was related to an increase in National Lending loans and leases and $159.9 million was related to Community Banking loans. This increase was partially offset by a decrease in total investment securities of $633.3 million, which decreased as the Company continued to utilize sales of securities and cash flow from its amortizing securities portfolio to fund loan growth.

The Company’s average balance of total deposits and interest-bearing liabilities was $5.14 billion for the three-month period ended June 30, 2019, compared to $3.70 billion for the same period in the prior year, representing an increase of 39%. This increase was primarily due to increases in average wholesale deposits of $1.07 billion, average noninterest-bearing deposits of $244.5 million, average time deposits of $67.8 million, average interest-bearing checking of $39.7 million, and the average balance of total borrowings of $20.5 million.

Overall, the Company's cost of funds for all deposits and borrowings averaged 1.14% during the fiscal 2019 third quarter, compared to 0.62% for the 2018 third fiscal quarter. This increase was primarily due to a rise in short-term interest rates affecting overnight borrowing rates, other wholesale funding, and the interest-bearing time deposits acquired by the Company in connection with the Crestmark acquisition in the fourth quarter of fiscal 2018. The Company's overall cost of deposits was 0.90% in the 2019 fiscal third quarter, compared to 0.29% in the same quarter of 2018.

The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.  Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin.  Non-accruing loans and leases have been included in the table as loans carrying a zero yield.

57
Table of Contents

Three Months Ended June 30,
2019
 
2018
(Dollars in Thousands)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate(1)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate(2)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash & fed funds sold
$
80,100

 
$
521

 
2.61
%
 
$
57,164

 
$
388

 
2.72
%
Mortgage-backed securities
421,725

 
3,063

 
2.91
%
 
617,815

 
3,950

 
2.56
%
Tax exempt investment securities
690,732

 
4,058

 
2.98
%
 
1,373,444

 
8,635

 
3.34
%
Asset-backed securities
307,581

 
2,701

 
3.52
%
 
189,389

 
1,537

 
3.25
%
Other investment securities
199,681

 
1,557

 
3.13
%
 
72,381

 
538

 
2.98
%
Total investments
1,619,719

 
11,379

 
3.09
%
 
2,253,029

 
14,660

 
3.11
%
Total commercial finance
1,775,905

 
44,332

 
10.01
%
 
299,676

 
3,813

 
5.10
%
Total consumer finance
364,633

 
8,178

 
9.00
%
 
208,937

 
3,717

 
7.13
%
Total tax services
45,142

 
—

 
—
%
 
22,268

 
—

 
—
%
Total warehouse finance
223,546

 
3,491

 
6.26
%
 
—

 
—

 
—
%
National Lending loans and leases
2,409,226

 
56,001

 
9.32
%
 
530,881

 
7,530

 
5.69
%
Community Banking loans
1,189,912

 
13,731

 
4.63
%
 
1,030,016

 
11,526

 
4.49
%
Total loans and leases
3,599,138

 
69,732

 
7.77
%
 
1,560,897

 
19,056

 
4.90
%
Total interest-earning assets
5,298,957

 
$
81,632

 
6.26
%
 
3,871,090

 
$
34,104

 
3.82
%
Noninterest-earning assets
820,474

 
 
 
 
 
369,200

 
 
 
 
Total assets
$
6,119,431

 
 
 
 
 
$
4,240,290

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
137,950

 
$
85

 
0.25
%
 
$
98,235

 
$
54

 
0.22
%
Savings
54,247

 
9

 
0.07
%
 
59,546

 
10

 
0.07
%
Money markets
58,782

 
107

 
0.73
%
 
46,742

 
28

 
0.24
%
Time deposits
128,165

 
633

 
1.98
%
 
60,373

 
167

 
1.11
%
Wholesale deposits
1,521,594

 
9,561

 
2.52
%
 
453,885

 
2,005

 
1.77
%
Total interest-bearing deposits
1,900,738

 
10,395

 
2.19
%
 
718,781

 
2,264

 
1.26
%
Overnight fed funds purchased
363,857

 
2,368

 
2.61
%
 
402,088

 
2,041

 
2.04
%
FHLB advances
54,341

 
324

 
2.39
%
 
—

 
—

 
—
%
Subordinated debentures
73,583

 
1,163

 
6.34
%
 
73,430

 
1,102

 
6.02
%
Other borrowings
40,653

 
414

 
4.08
%
 
36,408

 
286

 
3.15
%
Total borrowings
532,434

 
4,269

 
3.22
%
 
511,926

 
3,429

 
2.69
%
Total interest-bearing liabilities
2,433,172

 
14,664

 
2.42
%
 
1,230,707

 
5,693

 
1.86
%
Noninterest-bearing deposits
2,710,288

 
—

 
—
%
 
2,465,750

 
—

 
—
%
Total deposits and interest-bearing liabilities
5,143,460

 
$
14,664

 
1.14
%
 
3,696,457

 
$
5,693

 
0.62
%
Other noninterest-bearing liabilities
149,207

 
 
 
 
 
98,973

 
 
 
 
Total liabilities
5,292,667

 
 
 
 
 
3,795,430

 
 
 
 
Shareholders' equity
826,764

 
 
 
 
 
444,860

 
 
 
 
Total liabilities and shareholders' equity
$
6,119,431

 
 
 
 
 
$
4,240,290

 
 
 
 
Net interest income and net interest rate spread including noninterest-bearing deposits
 
 
$
66,968

 
5.12
%
 
 
 
$
28,411

 
3.21
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
5.07
%
 
 
 
 
 
2.94
%
Tax-equivalent effect
 
 
 
 
0.08
%
 
 
 
 
 
0.29
%
Net interest margin, tax-equivalent(3)
 
 
 
 
5.15
%
 
 
 
 
 
3.23
%
(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2019 was 21%.
(2) Tax rate used to arrive at the TEY for the three months ended June 30, 2018 was 24.53%.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("Net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully-taxable-equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.




58
Table of Contents

Nine Months Ended June 30,
2019
 
2018
(Dollars in Thousands)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate (1)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate(2)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash & fed funds sold
$
148,751

 
$
2,989

 
2.69
%
 
$
96,496

 
$
1,717

 
2.38
%
Mortgage-backed securities
392,395

 
8,622

 
2.94
%
 
644,578

 
11,755

 
2.44
%
Tax exempt investment securities
952,501

 
17,999

 
3.20
%
 
1,404,571

 
26,333

 
3.32
%
Asset-backed securities
297,316

 
8,090

 
3.64
%
 
131,705

 
3,522

 
3.58
%
Other investment securities
150,888

 
3,301

 
2.93
%
 
75,877

 
1,662

 
2.93
%
Total investments
1,793,101

 
38,012

 
3.19
%
 
2,256,731

 
43,272

 
3.07
%
Total commercial finance
1,662,322

 
125,566

 
10.10
%
 
266,310

 
9,691

 
4.87
%
Total consumer finance
327,700

 
21,697

 
8.85
%
 
206,263

 
10,043

 
6.51
%
Total tax services
140,515

 
8,206

 
7.81
%
 
146,071

 
833

 
0.76
%
Total warehouse finance
168,081

 
7,912

 
6.29
%
 
—

 
—

 
—
%
National Lending loans and leases
2,298,618

 
163,382

 
9.50
%
 
618,644

 
20,567

 
4.44
%
Community Banking loans
1,175,667

 
40,519

 
4.61
%
 
986,902

 
32,777

 
4.44
%
Total loans and leases
3,474,285

 
203,900

 
7.85
%
 
1,605,546

 
53,344

 
4.44
%
Total interest-earning assets
5,416,137

 
$
244,902

 
6.16
%
 
3,958,773

 
$
98,333

 
3.61
%
Noninterest-earning assets
877,130

 
 
 
 
 
394,451

 
 
 
 
Total assets
$
6,293,267

 
 
 
 
 
$
4,353,224

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
129,656

 
$
220

 
0.23
%
 
$
90,055

 
$
155

 
0.23
%
Savings
54,643

 
28

 
0.07
%
 
57,397

 
27

 
0.06
%
Money markets
56,987

 
263

 
0.62
%
 
47,814

 
82

 
0.23
%
Time deposits
160,740

 
2,229

 
1.85
%
 
102,636

 
877

 
1.14
%
Wholesale deposits
1,832,237

 
32,990

 
2.41
%
 
540,193

 
5,965

 
1.48
%
Total interest-bearing deposits
2,234,264

 
35,731

 
2.14
%
 
838,095

 
7,106

 
1.13
%
Overnight fed funds purchased
287,985

 
5,485

 
2.55
%
 
315,359

 
4,244

 
1.80
%
FHLB advances
18,114

 
324

 
2.39
%
 
91,392

 
947

 
1.39
%
Subordinated debentures
73,543

 
3,486

 
6.34
%
 
73,394

 
3,329

 
6.07
%
Other borrowings
43,690

 
1,286

 
3.93
%
 
26,343

 
695

 
3.53
%
Total borrowings
423,332

 
10,581

 
3.34
%
 
506,488

 
9,215

 
2.43
%
Total interest-bearing liabilities
2,657,595

 
46,312

 
2.33
%
 
1,344,583

 
16,321

 
1.62
%
Noninterest-bearing deposits
2,715,870

 
—

 
—
%
 
2,482,274

 
—

 
—
%
Total deposits and interest-bearing liabilities
5,373,465

 
$
46,312

 
1.15
%
 
3,826,857

 
$
16,321

 
0.57
%
Other noninterest-bearing liabilities
128,924

 
 
 
 
 
85,626

 
 
 
 
Total liabilities
5,502,389

 
 
 
 
 
3,912,483

 
 
 
 
Shareholders' equity
790,878

 
 
 
 
 
440,741

 
 
 
 
Total liabilities and shareholders' equity
$
6,293,267

 
 
 
 
 
$
4,353,224

 
 
 
 
Net interest income and net interest rate spread including noninterest-bearing deposits
 
 
$
198,590

 
5.01
%
 
 
 
$
82,012

 
3.04
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
4.90
%
 
 
 
 
 
2.77
%
Tax-equivalent effect
 
 
 
 
0.12
%
 
 
 
 
 
0.29
%
Net interest margin, tax-equivalent(3)
 
 
 
 
5.02
%
 
 
 
 
 
3.06
%
(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2019 was 21%.
(2) Tax rate used to arrive at the TEY for the nine months ended June 30, 2018 was 24.53%.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("Net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully-taxable-equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.


59
Table of Contents

Provision for Loan and Lease Losses.  The Company recorded a $9.1 million and a $51.5 million provision for loan and lease losses for the three- and nine-month periods ended June 30, 2019, respectively, as compared to a $5.3 million and a $24.7 million provision for loan and lease losses for the three- and nine-month periods ended June 30, 2018, respectively. Also see Note 4 to the Condensed Consolidated Financial Statements included in this quarterly report.

Noninterest Income.  Noninterest income for the fiscal 2019 third quarter increased by $10.6 million, or 32%, to $43.8 million from $33.2 million for the same period in the prior fiscal year, largely due to increases in rental income of $9.4 million, gain on sale of loans and leases of $1.9 million, other income of $1.6 million, and deposit fees of $1.2 million. Partially offsetting the increase in noninterest income, card fee income decreased $3.3 million and total tax product fee income decreased $0.6 million from the same quarter of the prior fiscal year. The increases in rental income, other income and gain on sale of loans and leases were largely attributable to the Crestmark acquisition.

Noninterest income for the nine months ended June 30, 2019 was $186.6 million, an increase of $26.7 million, or 17%, from the same period in the prior fiscal year. This increase was primarily due to an increase in rental income, other income, deposit fees, and an increase in gain on sale of investment securities.

Noninterest Expense.  Noninterest expense increased $23.4 million, or 48%, to $72.5 million for the 2019 fiscal third quarter, compared to the same quarter in 2018. This increase was primarily caused by increases of $10.7 million in compensation and benefits expense, $6.0 million in operating lease equipment depreciation expense, and $3.7 million in other expense. Increases in intangible amortization expense, occupancy and equipment, and legal and consulting also contributed to the increase in noninterest expense. The increase in compensation and benefits expense was primarily due to the addition of Crestmark division employees, and new hires in the second half of fiscal 2018 in support of Meta's National Lending and other business initiatives.

Noninterest expense for the nine months ended June 30, 2019 increased by $95.4 million, or 59%, to $257.0 million compared to the same period in the prior fiscal year. This increase was primarily caused by increases in compensation and benefits expense, other expense, impairment expense, intangible amortization expense, occupancy and equipment, and legal and consulting expense.

Income Tax. The Company recorded an income tax benefit for the fiscal 2019 third quarter of $1.2 million, resulting in an effective tax rate of (3.97%), compared to an income tax expense of $0.5 million, or an effective tax rate of 6.55%, for the fiscal 2018 third quarter. Investment tax credits related to solar leases and future originations in fiscal 2019 will be recognized ratably based on income over the duration of the current fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser extent through its Community Banking division borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. 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 uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses.  At June 30, 2019, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.01 billion. The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.


60
Table of Contents

In July 2013, the Company’s primary federal regulator, the Federal Reserve and the Bank’s primary federal regulator, the OCC, approved final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations, which replaced earlier frameworks adopted in 1988 ("Basel I") and 2004 (Basel II). The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to financial institution holding companies and their depository institution subsidiaries, including us and the Bank, as compared to U.S. general risk-based capital rules. The Basel III Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other issues affecting the numerator in banking institutions’ regulatory capital ratios. In addition, the Basel III Capital Rules implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.

Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). At June 30, 2019, both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.  The Company and the Bank took the accumulated other comprehensive income (“AOCI”) opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. 

The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies.  Management reviews these measures along with other measures of capital as part of its financial analysis.
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum to be
 
Minimum to be
 
 
 
 
 
Adequately
 
Well Capitalized
 
 
 
 
 
Capitalized Under
 
Under Prompt
 
 
 
 
 
Prompt Corrective
 
Corrective Action
At June 30, 2019
Company
 
Bank
 
Action Provisions
 
Provisions
 
 
 
 
 
 
 
 
Tier 1 leverage capital ratio
8.05
%
 
9.37
%
 
4.00
%
 
5.00
%
Common equity Tier 1 capital ratio
10.19

 
12.22

 
4.50

 
6.50

Tier 1 capital ratio
10.55

 
12.27

 
6.00

 
8.00

Total capital ratio
13.22

 
13.26

 
8.00

 
10.00





61
Table of Contents

The following table provides certain non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP:
 
Standardized Approach(1)
June 30, 2019
 
(Dollars in Thousands)
Total stockholders' equity
$
822,901

Adjustments:


LESS: Goodwill, net of associated deferred tax liabilities
302,850

LESS: Certain other intangible assets
53,249

LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
13,858

LESS: Net unrealized gains (losses) on available-for-sale securities
2,329

LESS: Noncontrolling interest
3,508

Common Equity Tier 1 Capital (1)
447,107

Long-term borrowings and other instruments qualifying as Tier 1
13,661

Tier 1 minority interest not included in common equity tier 1 capital
2,119

Total Tier 1 Capital
462,887

Allowance for loan and lease losses
43,641

Subordinated debentures (net of issuance costs)
73,605

Total Capital
580,133

(1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes are being fully phased in through the end of 2021.

The following table provides a reconciliation of tangible common equity and tangible common equity excluding AOCI, each of which is used in calculating tangible book value data, to Total Stockholders' Equity at June 30, 2019. Each of tangible common equity and tangible common equity excluding AOCI is a non-GAAP financial measure that is commonly used within the banking industry.
 
June 30, 2019
 
(Dollars in Thousands)
Total Stockholders' Equity
$
822,901

LESS: Goodwill
307,941

LESS: Intangible assets
56,153

     Tangible common equity
458,807

LESS: AOCI
2,308

     Tangible common equity excluding AOCI
456,499

Since January 1, 2016, the Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The implementation of the capital conservation buffer by annual increments finished on January 1, 2019, so that the required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively.
Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios.


62
Table of Contents

CONTRACTUAL OBLIGATIONS

See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in the Company’s Annual Report on Form 10-K for its fiscal year ended September 30, 2018 for a summary of our contractual obligations as of September 30, 2018. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2018 through June 30, 2019.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

For discussion of the Company’s off-balance sheet financing arrangements as of June 30, 2019, see Note 12 to our consolidated financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 12 occur, the effect on the Company’s capital and net income could be significant.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

MARKET RISK

The Company derives a portion of its income 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 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 and the Company’s ability to adapt to these changes is known as interest rate risk and is the Company’s only significant “market” risk.

The Company monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and risk policies established by the Board of Directors, and in order to preserve stockholder value. In monitoring interest rate risk, the Company analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency, maturity date and likelihood of prepayment.

The Company’s primary objective for its investment portfolio is to provide a source of liquidity for the Company. In addition, the investment portfolio may be used in the management of the Company’s interest rate risk profile. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company’s need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and the need to fulfill the Company’s asset/liability management goals.

The Company’s cost of funds responds to changes in interest rates due to the relatively short-term nature of its wholesale deposit portfolio and the relatively short-term nature of its borrowed funds. The Company believes that its growing portfolio of longer duration, low-cost deposits generated from its prepaid division provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest rate environment than it would otherwise have without this portfolio. 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 these deposits, which thereby compress the Company’s net interest margin.

The Board of Directors and relevant government regulations establish limits on the level of acceptable interest rate risk at the Company, to which management adheres. 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.


63
Table of Contents

Interest Rate Risk (“IRR”)

Overview. The Company actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. The Company's interest rate risk analysis is designed to compare income and economic valuation simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as well as the slope of the yield curve. The Company does not currently engage in trading activities to control interest rate risk although it may do so in the future, if deemed necessary, to help manage interest rate risk.

Earnings at risk and economic value analyses. As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to monitor interest rate risk, the Board of Directors has created an Asset Liability Committee whose principal responsibilities are to assess the Bank’s asset/liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes in interest rates.

The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value of Equity (“EVE analysis”). Under EAR analysis, net interest income is calculated for each interest rate scenario to the net interest income forecast in the base case. EAR analysis measures the sensitivity of interest-sensitive earnings over a one-year minimum time horizon. The results are affected by projected rates, prepayments, caps and floors. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricing, as well as events outside of management's control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude, and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing, as well as market-implied forward rates and various likely and extreme interest rate scenarios, including rapid and gradual interest rate ramps, rate shocks and yield curve twists.

The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management. It models -200, -100, +100, +200, +300, and +400 basis point parallel shifts in market interest rates over the next one-year period. Due to the current low level of interest rates, only -100 and -200 basis point parallel shifts are represented.

The Company was within Board policy limits for all interest rate scenarios as of June 30, 2019.  The table below shows the results of the scenarios as of June 30, 2019:
 
 
 
 
 
 
 
 
 
 
Net Sensitive Earnings at Risk
 
 
 
Change in Interest Income/Expense
for a given change in interest rates
 
 
 
Over / (Under) Base Case Parallel Shift
(Dollars in thousands)
Book Value
 
-200
 
-100
 
Base
 
100
 
200
 
300
400
Total Interest-Sensitive Income
5,161,411

 
263,554

 
284,232

 
306,880

 
329,113

 
350,310

 
370,893

391,473

Total Interest-Sensitive Expense
2,292,395

 
23,527

 
35,702

 
48,132

 
60,551

 
72,664

 
84,779

96,897

Net Interest-Sensitive Income
2,869,016


240,027


248,530


258,748


268,562


277,646


286,114

294,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Change from Base
—
 
-7.2
 %
 
-3.9
 %
 
—
%
 
3.8
 %
 
7.3
 %
 
10.6
 %
13.8
 %
Board Policy Limits
—
 
-12.0
 %
 
-8.0
 %
 
—
%
 
-8.0
 %
 
-10.0
 %
 
-15.0
 %
-20.0
 %

The EAR analysis reported at June 30, 2019, shows that in all rising rate scenarios, more assets than liabilities would reprice over the modeled one-year period.

64
Table of Contents

IRR is a snapshot in time. The Company’s business and deposits are very predictably cyclical on a weekly, monthly and yearly basis. The Company’s static IRR results could vary depending on which day of the week and timing in relation to certain payrolls, as well as time of the month in regard to early funding of certain programs, when this snapshot is taken. The Company’s overnight federal funds purchased fluctuates on a predictable daily and monthly basis due to fluctuations in a portion of its noninterest-bearing deposit base, primarily related to payroll processing and timing of when certain programs are prefunded and when the funds are received.
The Company believes that its growing portfolio of noninterest-bearing deposits provides a stable and profitable funding vehicle and a significant competitive advantage in a rising interest rate environment, as the Company’s cost of funds would likely remain low, with less of an increase in the cost of funds expected relative to many other banks.
Under EVE analysis, the economic value of financial assets, liabilities and off-balance sheet instruments, is derived under each rate scenario. The economic value of equity is calculated as the difference between the estimated market value of assets and liabilities, net of the impact of off-balance sheet instruments.
The EVE analysis used in the following table reflects the required analysis used no less than quarterly by management. It models immediate -200, -100, +100, +200, +300 and +400 basis point parallel shifts in market interest rates. Due to the current low level of interest rates, only -100 and -200 basis point parallel shifts are represented.
The Company was within Board policy limits for all scenarios. The table below shows the results of the scenarios as of June 30, 2019:

Economic Value Sensitivity as of June 30, 2019
 
Standard (Parallel Shift)
 
Economic Value of Equity at Risk%
 
-200
 
-100
 
100
 
200
 
300
400
Percentage Change from Base
-12.9
 %
 
-5.2
 %
 
2.5
 %
 
3.5
 %
 
3.6
 %
3.6
 %
Board Policy Limits
-20.0
 %
 
-10.0
 %
 
-10.0
 %
 
-20.0
 %
 
-25.0
 %
-35.0
 %

The EVE at risk reported at June 30, 2019 shows that as interest rates increase, the economic value of equity position will be relatively neutral. When viewing total asset versus total liability economic value, projected total assets are affected similarly on a percentage basis as compared to projected total liabilities in a rising rate environment.

65
Table of Contents


Item 4.    Controls and Procedures.

CONTROLS AND PROCEDURES

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met.  Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this quarterly report.
 
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2019, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that (i) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The ineffectiveness of the Company's disclosure controls and procedures was due to a material weakness identified in the Company's internal controls over financial reporting, which is described below. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

In the third fiscal quarter of 2019, the Company identified a material weakness in the control environment of the Crestmark division, which was acquired by the Company on August 1, 2018. Several deficiencies were identified in the Company's control environment that were primarily related to inappropriate user access specific to information technology ("IT") applications used by the Crestmark division and lack of completeness of certain review procedures with respect to such user access. The user access issues included untimely completion of user access reviews on certain systems, instances of users having access rights beyond what appeared to be needed, and instances of user access not being appropriately added or removed from certain systems. The lack of completeness of certain review procedures was, in many cases, due to a completeness control not being documented, meaning that subject reports had not been compared to the source document to determine all required data was included in the report. These deficiencies did not result in any known material misstatement to the Company's annual or interim financial statements to date following the Crestmark acquisition. Accordingly, management determined the aggregation of these deficiencies represents a material weakness in internal controls over financial reporting on the basis that they could result in a misstatement potentially impacting the Company's financial statement accounts and disclosures that would not be prevented or detected on a timely basis. Also, the IT deficiencies could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls relating to the financial statements. In addition, these deficiencies could affect the IT controls and underlying data that support the effectiveness of system-generated reports.


66
Table of Contents

REMEDIATION PLAN FOR REPORTED MATERIAL WEAKNESS

The Company is engaged in implementing a remediation plan to address the material weakness described above and is committed to maintaining a strong internal controls environment. To address the material weakness, the Company is in the process of re-evaluating IT governance and controls, updating procedures related to access management, and training IT personnel, with a focus on controls related to user access over IT systems. The Company is also ensuring review procedures at the Crestmark division are being performed with complete populations of data. Management believes that the measures described above will effectively remediate the identified material weakness and strengthen the Company’s internal controls over financial reporting. However, we cannot assure you that these steps will remediate such weakness or whether additional actions will be required or the timing or costs of any such additional actions. Because the reliability of the internal controls process requires repeatable execution, the successful remediation of this material weakness will require review and evidence of effectiveness prior to management concluding that the controls are effective. Management believes that remediation efforts will be completed during the fourth quarter of fiscal 2019.  If not remediated, however, these deficiencies could result in material misstatements to the Company's consolidated financial statements.
 
INTERNAL CONTROLS OVER FINANCIAL REPORTING

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.  Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting except as set forth above.

67
Table of Contents

META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION

FORM 10-Q


Item 1. Legal Proceedings. - See “Legal Proceedings” under Note 12 to the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.


Item 1A. Risk Factors. - A description of our risk factors can be found in "Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. There were no material changes to those risk factors during the nine months ended June 30, 2019, except that the first risk factor is hereby added and the remaining risk factors are hereby amended and restated in their entirety as follows:

Our investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our results of operations.

We invest in certain tax-advantaged investments that support renewable energy resources. Our investments in these projects are designed to generate a return in part through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized. For example, as previously disclosed, we previously recognized $7.9 million of investment tax credits between fiscal year 2017 and 2018 associated with the MSGs subject to the transactions with the DC Solar entities. We are aware that the DC Solar entities, including their principals, are subjects of ongoing federal investigations involving allegations of fraudulent misconduct. While we continue to gather information about the situation, there can be no assurances that such tax credits will not be subject to recapture in the future. See Note 3. Acquisitions to the Condensed Consolidated Financial Statements included herein for further information regarding the transactions with these DC Solar entities and related matters.

The risk of not being able to realize, or of subsequently incurring a recapture of, the tax credits and other tax benefits depends on various factors, some of which are outside our control, including changes in the applicable tax code, as well as the continued economic viability of the project and project operator.  Further, while we engage in due diligence review both prior to the initial investment and on an ongoing basis, our due diligence review may not identify relevant issues or risks that may adversely impact our ability to realize these tax credits or other tax benefits. The possible inability to realize these tax credits and other tax benefits may have a negative impact on our financial results.

We incur significant costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; if we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and our reputation.

As an SEC reporting company, we are required to, among other things, maintain a system of effective internal control over financial reporting, which requires annual management and independent registered public accounting firm assessments of the effectiveness of our internal controls. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have historically dedicated a significant amount of time and resources to implement our internal financial and accounting controls and procedures. Substantial work may continue to be required to further implement, document, assess, test, and, if necessary, remediate our system of internal controls. We may also need to retain additional finance and accounting personnel in the future.

Control failures, including failures in our controls over financial reporting, could result from human error, fraud, breakdowns in information and computer systems, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse, or repair the negative effects of such failures or interruptions.


68
Table of Contents

Moreover, we rely heavily upon information systems and other operating technologies to conduct and manage our business. To the extent that our technology fails to keep up with our changing environment, we may be unable to conduct and manage our business effectively. Any technical failure or interruption could harm our risk management and profitability and could adversely impact our financial condition and results of operations.

We identified control deficiencies in our internal controls over financial reporting related to the Crestmark division's information technology control environment. Specifically, these control deficiencies were in the areas of user access to applications used by the Crestmark division and lack of completeness of certain review procedures with respect to such user access. These control deficiencies were evaluated, both individually and in the aggregate, and management identified the aggregation of these deficiencies as a material weakness in our internal controls, as described more fully in “Item 4. Controls and Procedures” of Part I of this quarterly report. These control deficiencies could result in a misstatement of any of our financial statement accounts and disclosures that, in turn, could result in a material misstatement of our annual or interim final statements that may not be prevented or detected. In addition, other control deficiencies of this or a similar nature may be identified in the future.

If we are unable to correct the material weakness or deficiencies in internal controls over financial reporting in a timely manner or if future instances of an ineffective control environment exist, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected, and we may be unable to comply with the periodic reporting requirements of the SEC. This failure, which could cause our investors to lose confidence in our reported financial information, could subject us to investigation and sanction by the SEC or other regulatory authorities and to claims by stockholders, which could impose significant additional costs on us, divert our management's attention and generally, materially, and adversely impact our business and financial condition. Additionally, our common stock listing on the NASDAQ Global Select Market could be suspended or terminated, and our stock price could materially suffer. See also Item 4. Controls and Procedures in Part I of this quarterly report.

Crestmark’s business presents a heightened degree of operational and credit risks to the Bank.

Crestmark’s focus on asset-based loans and other forms of commercial financing subjects Crestmark and, therefore, the Bank to the potential for fraud by borrowers regarding the value of underlying collateral. As a result, the Bank may assume different or greater lending risks than other commercial lenders in connection with the commercial products and services offered through the Crestmark division. Even routine funding transactions expose the Bank to credit risk in the event of default of its counterparty or client. In addition, credit risk related to products and services offered by the Crestmark division may be exacerbated when the collateral held by the Bank cannot be realized upon or is liquidated at prices insufficient to recover the full amount due under the financial instrument. Lastly, the use of and reliance on information systems specific to Crestmark’s business increases the operational risk of this recently acquired business. We define operational risk as the risk arising from inadequate or failed processes, people, and/or systems, including those emanating from external sources. While operational risk is inherent in all of our business activities, processes, and systems, the operational risk of the Crestmark division is elevated due to the material weakness identified during the quarter ended June 30, 2019, which is described in Item 4. Controls and Procedures in Part I of this quarterly report.

69
Table of Contents


Item 2. Unregistered Sales of Securities and Use of Proceeds.

(a) None
(b) None
(c) Issuer Purchases of Equity Securities

Meta's Board of Directors authorized a 2,000,000 share repurchase program that is scheduled to expire on September 30, 2021. The share repurchase program was announced on March 26, 2019 and became effective on May 1, 2019. The table below sets forth information regarding repurchases of our common stock during the third fiscal quarter of 2019.
Period
Total Number of Shares Repurchased(1)
 
Average Price Paid per Share(1)(2)
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that may yet be Repurchased Under the Program
April 1 to 30
—

 
$
—

 
—

 
—

May 1 to 31
820,251

 
26.80

 
820,098

 
1,179,902

June 1 to 30
754,972

 
27.73

 
754,636

 
425,266

  Total
1,575,223

 
 
 
1,574,734

 
 
(1) These columns also reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit awards, which vested during the quarter, and shares repurchased pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934.
(2) The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.


Item 6. Exhibits.
Exhibit
Number
Description
 
 
Section 302 certification of Chief Executive Officer.
 
 
Section 302 certification of Chief Financial Officer.
 
 
Section 906 certification of Chief Executive Officer.
 
 
Section 906 certification of Chief Financial Officer.
 
 
101.INS
Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


70
Table of Contents

META FINANCIAL GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
META FINANCIAL GROUP, INC.
 
 
 
Date: August 7, 2019
By:
/s/ Bradley C. Hanson
 
 
Bradley C. Hanson,
 
 
President, Chief Executive Officer and Director
 
 
 
Date: August 7, 2019
By:
/s/ Glen W. Herrick
 
 
Glen W. Herrick, Executive Vice President
 
 
and Chief Financial Officer

71