PATHWARD FINANCIAL, INC. - Quarter Report: 2020 December (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 December 31, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-22140
META FINANCIAL GROUP INC.®
(Exact name of registrant as specified in its charter)
| Delaware | 42-1406262 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices and Zip Code)
(605) 782-1767
(Registrant’s telephone number, including area code)
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 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit 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
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 February 3, 2021: | ||||||||||
| Common Stock, $.01 par value | 32,248,629 | Shares | |||||||||
| Nonvoting Common Stock, $.01 par value | 0 | Nonvoting shares | |||||||||
META FINANCIAL GROUP, INC.
FORM 10-Q
Table of Contents
| Item 1. | ||||||||
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| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
i
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 and Per Share Data) | December 31, 2020 | September 30, 2020 | |||||||||
| ASSETS | (Unaudited) | (Audited) | |||||||||
| Cash and cash equivalents | $ | 1,586,451 | $ | 427,367 | |||||||
| Investment securities available for sale, at fair value | 797,363 | 814,495 | |||||||||
| Mortgage-backed securities available for sale, at fair value | 430,761 | 453,607 | |||||||||
| Investment securities held to maturity, at cost | 76,176 | 87,183 | |||||||||
| Mortgage-backed securities held to maturity, at cost | 5,152 | 5,427 | |||||||||
| Loans held for sale | 133,659 | 183,577 | |||||||||
| Loans and leases | 3,448,675 | 3,322,765 | |||||||||
| Allowance for credit losses | (72,389) | (56,188) | |||||||||
| Federal Reserve Bank and Federal Home Loan Bank stocks, at cost | 27,138 | 27,138 | |||||||||
| Accrued interest receivable | 17,133 | 16,628 | |||||||||
| Premises, furniture, and equipment, net | 39,932 | 41,608 | |||||||||
| Rental equipment, net | 206,732 | 205,964 | |||||||||
| Bank-owned life insurance | 92,937 | 92,315 | |||||||||
| Foreclosed real estate and repossessed assets. net | 7,186 | 9,957 | |||||||||
| Goodwill | 309,505 | 309,505 | |||||||||
| Intangible assets | 39,660 | 41,692 | |||||||||
| Prepaid assets | 11,270 | 8,328 | |||||||||
| Deferred taxes, net | 24,411 | 17,723 | |||||||||
| Other assets | 82,763 | 82,983 | |||||||||
| Total assets | $ | 7,264,515 | $ | 6,092,074 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing checking | 5,581,597 | 4,356,630 | |||||||||
| Interest-bearing checking | 274,504 | 157,571 | |||||||||
| Savings deposits | 54,080 | 47,866 | |||||||||
| Money market deposits | 56,440 | 48,494 | |||||||||
| Time certificates of deposit | 13,522 | 20,223 | |||||||||
| Wholesale deposits | 227,648 | 348,416 | |||||||||
| Total deposits | 6,207,791 | 4,979,200 | |||||||||
| Short-term borrowings | — | — | |||||||||
| Long-term borrowings | 96,760 | 98,224 | |||||||||
| Accrued interest payable | 2,068 | 1,923 | |||||||||
| Accrued expenses and other liabilities | 144,686 | 165,419 | |||||||||
| Total liabilities | 6,451,305 | 5,244,766 | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Preferred stock, 3,000,000 shares authorized, no shares issued and no shares outstanding at December 31, 2020 and September 30, 2020, respectively | — | — | |||||||||
Common stock, $0.01 par value; 90,000,000 shares authorized, 32,817,626 and 34,479,164 shares issued, 32,620,251 and 34,360,890 shares outstanding at December 31, 2020 and September 30, 2020, respectively | 326 | 344 | |||||||||
Common stock, Nonvoting, $0.01 par value; 3,000,000 shares authorized, no shares issued, none outstanding at December 31, 2020 and September 30, 2020, respectively | — | — | |||||||||
| Additional paid-in capital | 598,669 | 594,569 | |||||||||
| Retained earnings | 198,000 | 234,927 | |||||||||
| Accumulated other comprehensive income | 20,119 | 17,542 | |||||||||
Treasury stock, at cost, 197,375 and 118,274 common shares at December 31, 2020 and September 30, 2020, respectively | (5,440) | (3,677) | |||||||||
| Total equity attributable to parent | 811,674 | 843,705 | |||||||||
| Noncontrolling interest | 1,536 | 3,603 | |||||||||
| Total stockholders’ equity | 813,210 | 847,308 | |||||||||
| Total liabilities and stockholders’ equity | $ | 7,264,515 | $ | 6,092,074 | |||||||
See Notes to Condensed Consolidated Financial Statements.
2
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands, Except Share and Per Share Data) | 2020 | 2019 | |||||||||
| Interest and dividend income: | |||||||||||
| Loans and leases, including fees | $ | 61,655 | $ | 68,702 | |||||||
| Mortgage-backed securities | 2,123 | 2,389 | |||||||||
| Other investments | 4,368 | 6,534 | |||||||||
| 68,146 | 77,625 | ||||||||||
| Interest expense: | |||||||||||
| Deposits | 797 | 9,340 | |||||||||
| FHLB advances and other borrowings | 1,350 | 3,634 | |||||||||
| 2,147 | 12,974 | ||||||||||
| Net interest income | 65,999 | 64,651 | |||||||||
| Provision for credit losses | 6,089 | 3,407 | |||||||||
| Net interest income after provision for credit losses | 59,910 | 61,244 | |||||||||
| Noninterest income: | |||||||||||
| Refund transfer product fees | 647 | 192 | |||||||||
| Tax advance product fees | 1,960 | 2,276 | |||||||||
| Payment card and deposit fees | 22,564 | 21,499 | |||||||||
| Other bank and deposit fees | 237 | 487 | |||||||||
| Rental income | 9,885 | 12,351 | |||||||||
| Gain (loss) on sale of other | 2,847 | (2,568) | |||||||||
| Other income | 7,315 | 3,246 | |||||||||
| Total noninterest income | 45,455 | 37,483 | |||||||||
| Noninterest expense: | |||||||||||
| Compensation and benefits | 32,331 | 34,268 | |||||||||
| Refund transfer product expense | 61 | 173 | |||||||||
| Tax advance product expense | 370 | 1,132 | |||||||||
| Card processing | 6,117 | 5,607 | |||||||||
| Occupancy and equipment expense | 6,888 | 6,655 | |||||||||
| Operating lease equipment depreciation | 7,581 | 8,280 | |||||||||
| Legal and consulting | 5,247 | 4,674 | |||||||||
| Intangible amortization | 2,013 | 2,676 | |||||||||
| Impairment expense | 1,159 | 242 | |||||||||
| Other expense | 10,808 | 12,091 | |||||||||
| Total noninterest expense | 72,575 | 75,798 | |||||||||
| Income before income tax expense | 32,790 | 22,929 | |||||||||
| Income tax expense | 3,533 | 680 | |||||||||
| Net income before noncontrolling interest | 29,257 | 22,249 | |||||||||
| Net income attributable to noncontrolling interest | 1,220 | 1,181 | |||||||||
| Net income attributable to parent | $ | 28,037 | $ | 21,068 | |||||||
| Earnings per common share | |||||||||||
| Basic | $ | 0.84 | $ | 0.56 | |||||||
| Diluted | $ | 0.84 | $ | 0.56 | |||||||
See Notes to Condensed Consolidated Financial Statements.
3
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Net income before noncontrolling interest | $ | 29,257 | $ | 22,249 | |||||||
| Other comprehensive income (loss): | |||||||||||
| Change in net unrealized gain (loss) on debt securities | 2,846 | (3,412) | |||||||||
| 2,846 | (3,412) | ||||||||||
| Unrealized gain on currency translation | 445 | 116 | |||||||||
| Deferred income tax effect | 714 | (852) | |||||||||
| Total other comprehensive income (loss) | 2,577 | (2,444) | |||||||||
| Total comprehensive income | 31,834 | 19,805 | |||||||||
| Total comprehensive income attributable to noncontrolling interest | 1,220 | 1,181 | |||||||||
| Comprehensive income attributable to parent | $ | 30,614 | $ | 18,624 | |||||||
See Notes to Condensed Consolidated Financial Statements.
4
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
| (Dollars in Thousands, Except Share and Per Share Data) | Meta Financial Group, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2020 | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), Net of Tax | Treasury Stock | Total Meta Stockholders’ Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | 344 | $ | 594,569 | $ | 234,927 | $ | 17,542 | $ | (3,677) | $ | 843,705 | $ | 3,603 | $ | 847,308 | |||||||||||||||||||||||||||||||
| — | — | (8,351) | — | — | (8,351) | (2,452) | (10,803) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.05 per share) | — | — | (1,613) | — | — | (1,613) | — | (1,613) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares due to ESOP | 2 | 3,034 | — | — | — | 3,036 | — | 3,036 | |||||||||||||||||||||||||||||||||||||||
| Shares repurchased | (20) | 20 | (55,000) | — | (1,763) | (56,763) | — | (56,763) | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | 1,046 | — | — | — | 1,046 | — | 1,046 | |||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | 2,577 | — | 2,577 | — | 2,577 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 28,037 | — | — | 28,037 | 1,220 | 29,257 | |||||||||||||||||||||||||||||||||||||||
| Net investment by (distribution to) noncontrolling interests | — | — | — | — | — | — | (835) | (835) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 326 | $ | 598,669 | $ | 198,000 | $ | 20,119 | $ | (5,440) | $ | 811,674 | $ | 1,536 | $ | 813,210 | |||||||||||||||||||||||||||||||
| (Dollars in Thousands, Except Share and Per Share Data) | Meta Financial Group, Inc. Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2019 | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Meta Stockholders’ Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | 378 | $ | 580,826 | $ | 252,813 | $ | 6,339 | $ | (445) | $ | 839,911 | $ | 4,047 | $ | 843,958 | |||||||||||||||||||||||||||||||
Cash dividends declared on common stock ($0.05 per share) | — | — | (1,870) | — | — | (1,870) | — | (1,870) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares due to exercise of stock options | — | 118 | — | — | — | 118 | — | 118 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares due to restricted stock | 2 | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common shares due to ESOP | 1 | 3,219 | — | — | — | 3,220 | — | 3,220 | |||||||||||||||||||||||||||||||||||||||
| Shares repurchased | (9) | 9 | (28,006) | — | (2,742) | (30,748) | — | (30,748) | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | 3,506 | — | — | — | 3,506 | — | 3,506 | |||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | (2,444) | — | (2,444) | — | (2,444) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 21,068 | — | — | 21,068 | 1,181 | 22,249 | |||||||||||||||||||||||||||||||||||||||
| Net investment by (distribution to) noncontrolling interests | — | — | — | — | — | — | (923) | (923) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 372 | $ | 587,678 | $ | 244,005 | $ | 3,895 | $ | (3,187) | $ | 832,763 | $ | 4,305 | $ | 837,068 | |||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income before noncontrolling interest | $ | 29,257 | $ | 22,249 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation, amortization and accretion, net | 14,068 | 15,302 | |||||||||
| Stock compensation | 1,046 | 3,506 | |||||||||
| Provision (recovery): | |||||||||||
| Loan and lease losses | 6,089 | 3,407 | |||||||||
| Deferred taxes | (7,402) | (16) | |||||||||
| Loans held for sale: | |||||||||||
| Originations | (303,501) | (16,175) | |||||||||
| Proceeds from sales | 451,652 | 143,035 | |||||||||
| Net change | 5,425 | 11,111 | |||||||||
| Fair value adjustment of foreclosed real estate | 123 | 83 | |||||||||
| Net realized (gain) loss: | |||||||||||
| Other assets | — | 108 | |||||||||
| Foreclosed real estate and repossessed assets | — | 5,039 | |||||||||
| Loans held for sale | (3,492) | (1,851) | |||||||||
| Leases receivable and equipment | 633 | (685) | |||||||||
| Net change: | |||||||||||
| Other assets | (2,075) | (12,917) | |||||||||
| Accrued interest payable | 145 | (2,794) | |||||||||
| Accrued expenses and other liabilities | (20,733) | (33,892) | |||||||||
| Accrued interest receivable | (506) | 618 | |||||||||
| Change in bank-owned life insurance value | (621) | (631) | |||||||||
| Net cash provided by operating activities | 170,108 | 135,497 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Securities available for sale: | |||||||||||
| Purchases | (23,963) | — | |||||||||
| Proceeds from maturities and principal repayments | 64,982 | 52,592 | |||||||||
| Securities held to maturity: | |||||||||||
| Proceeds from maturities and principal repayments | 10,755 | 11,062 | |||||||||
| Loans and leases: | |||||||||||
| Purchases | (64,930) | (18,813) | |||||||||
| Proceeds from sales | 6,923 | 3,099 | |||||||||
| Net change | (170,684) | (167,929) | |||||||||
| Proceeds from sales of foreclosed real estate and repossessed assets | 2,657 | 23,085 | |||||||||
| Federal Reserve Bank and Federal Home Loan Bank stock: | |||||||||||
| Purchases | — | (244,240) | |||||||||
| Redemption | — | 261,360 | |||||||||
| Rental equipment: | |||||||||||
| Purchases | (13,146) | (17,956) | |||||||||
| Proceeds from sales | 5,609 | 2,250 | |||||||||
| Net change | — | 3,124 | |||||||||
| Premises, furniture, and equipment: | |||||||||||
| Purchases | (582) | (2,108) | |||||||||
| Net cash (used in) investing activities | (182,379) | (94,474) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net change: | |||||||||||
| Checking, savings, and money market deposits | 1,356,060 | 674,696 | |||||||||
| Time certificates of deposit | (6,701) | (86,683) | |||||||||
| Wholesale deposits | (120,768) | (118,481) | |||||||||
| FHLB and other borrowings | — | (20,000) | |||||||||
| Federal funds | — | (428,000) | |||||||||
| Securities sold under agreements to repurchase | — | (4,019) | |||||||||
| Distribution to noncontrolling interests | (835) | (923) | |||||||||
| Proceeds from other liabilities | — | 1,205 | |||||||||
| Principal payments: | |||||||||||
6
| Other liabilities | (1,498) | (2,194) | |||||||||
| Capital lease obligations | (8) | (1,818) | |||||||||
| Cash dividends paid | (1,613) | (1,870) | |||||||||
| Issuance of common stock due to ESOP | 3,036 | 3,220 | |||||||||
| Issuance of common stock due to restricted stock | — | 2 | |||||||||
| Proceeds from exercise of stock options and issuance of common stock | — | 118 | |||||||||
| Shares repurchased | (56,763) | (30,748) | |||||||||
| Net cash provided by (used in) financing activities | 1,170,910 | (15,495) | |||||||||
| Effect of exchange rate changes on cash | 445 | 116 | |||||||||
| Net change in cash and cash equivalents | 1,159,084 | 25,644 | |||||||||
| Cash and cash equivalents at beginning of fiscal year | 427,367 | 126,545 | |||||||||
| Cash and cash equivalents at end of fiscal period | $ | 1,586,451 | $ | 152,189 | |||||||
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 2,002 | $ | 10,180 | |||||||
| Income taxes | 289 | 220 | |||||||||
| Franchise taxes | 50 | 40 | |||||||||
| Other taxes | 14 | 12 | |||||||||
| Supplemental schedule of non-cash investing activities | |||||||||||
| Transfers | |||||||||||
| Loans and leases to foreclosed real estate and repossessed assets | 9 | 41 | |||||||||
| Loans and leases to rental equipment | 1,353 | 759 | |||||||||
| Rental equipment to loan and leases | 37 | 599 | |||||||||
| Loans and leases to held for sale | 100,442 | 251,913 | |||||||||
| Other assets to held for sale | 284 | 7,836 | |||||||||
| Deposits to held for sale | — | 286,648 | |||||||||
| Recognition of operating lease ROU assets, net of remeasurements | — | 27,019 | |||||||||
See Notes to Condensed Consolidated Financial Statements.
7
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, 2020 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 30, 2020. 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 months ended December 31, 2020 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2021.
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.
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, 2020 remain substantially unchanged with the exception of the accounting policies for allowance for credit losses and securities impairment as a result of adopting ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related ASUs, as described below.
Allowance for Credit Losses ("ACL"). The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, which generally means loans and leases identified as troubled debt restructures or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.
Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.
The impairment of all other loans and leases is evaluated collectively by various characteristics. The collective evaluation of expected losses in all commercial finance portfolios is based on a cohort loss rate and adjustments for forward-looking information, including industry and macroeconomic forecasts. The cohort loss rate is a life of loan loss rate that immediately reverts to historical loss information for the remaining maturity of the financial asset. Management has elected to use a twelve-month reasonable and supportable forecast for forward-looking information. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts and measurement date credit characteristics such as product type, delinquency, and industry. The unfunded credit commitments depend on these same factors, as well as estimates of lines of credit usage. The various quantitative and qualitative factors used in the methodologies are reviewed quarterly.
The collective evaluation of expected credit losses for certain consumer lending portfolios utilize different methodologies when estimating expected credit losses. The Company’s student loan portfolio utilizes a roll-rate historical loss rate and adjustments for forward-looking information, including macroeconomic conditions. Management has elected to use a twelve-month reasonable and supportable forecast with an immediate reversion to historical loss rates. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts, and measurement date credit characteristics including delinquency.
8
Loans and leases are charged off to the extent they are deemed uncollectible. Net charge-offs are included in historical data utilized for calculating the ACL. For commercial loans, the Company generally fully charges off or charges down to net realized value (fair value of collateral, less estimated costs to sell) for loans secured by collateral when management judges the loan to be uncollectible, repayment is deemed to be protracted beyond a reasonable timeframe, the loan has been classified as a loss by either the Company’s internal loan review process or its banking regulatory agencies, the Company has filed bankruptcy and the loss becomes evident owing to lack of assets, or the loans meets a defined number of days past due unless the loan is both well-secured and is in the process of collection. For consumer loans, the Company fully charges off or charges down to net realizable value when deemed uncollectible due to bankruptcy or other factors or meets a defined number of days past due.
The amount of ACL depends significantly on management’s estimates or key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status, the amounts and timing of future cash flows expected to be received, forecasts of future economic conditions and reversion periods. Such estimates, appraisals, evaluations, cash flows and forecasts may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees, properties or economic conditions. These estimates are reviewed quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known.
Accrued interest receivable is presented separately on the Condensed Consolidated Statements of Financial Condition, and an ACL is not recorded for these balances. Generally, when a loan or lease is placed on nonaccrual status, typically when the collection of interest or principal is 90 days or more past due, uncollected interest accrued in prior years is charged off against the ACL and interest accrued in the current year is reversed against interest income.
Management maintains a framework of controls over the estimation process for the ACL, including review of collective reserve methodologies for compliance with GAAP. Management has a quarterly process to review the appropriateness of historical observation periods and loss assumptions and risk ratings assigned to loans and leases, if applicable. Management reviews its qualitative framework and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends. Management also maintains controls over information systems, models and spreadsheets used in the quantitative components of the reserve estimate. This includes the quality and accuracy of historical data used to derive loss rates, the inputs to industry and macroeconomic forecasts and the reversion periods utilized. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance. See Note 6. Loans and Leases, Net for further information.
Securities Impairment. The Company evaluates investment securities held-to-maturity for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Condensed Consolidated Statements of Operations. The Company has concluded its portfolio as of December 31, 2020 has a zero risk of credit loss due to the U.S. Government financial guarantees underlying the securities within the held-to-maturity portfolio and as a result has not recorded an allowance for credit loss.
The Company evaluates investment securities available-for-sale for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Condensed Consolidated Statements of Operations. See Note 5. Securities for further information.
Adopted ASUs
Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a current expected credit loss (“CECL”) methodology to determine the allowance for credit losses for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. The Company adopted CECL using the modified retrospective approach with a cumulative effect adjustment to Retained Earnings recorded on October 1, 2020.
9
Our adoption resulted in an ACL as of October 1, 2020 that is larger than the allowance for loan and lease losses (“ALLL”) that would have been recorded under legacy guidance on the same date by $12.8 million in total for all portfolios. A portion of this increase is a result of new requirements to record ACL on acquired loans and leases, regardless of any credit mark recorded. Under legacy guidance, credit marks were included in the determination of fair value adjustments reflected as a discount to the carrying value of the loans and leases and an ALLL was not recorded on acquired loans and leases until evidence of credit deterioration existed post acquisition. The remaining credit and interest mark will continue to accrete over the life of the loan or lease but will no longer be considered when estimating the ACL for acquired loans and leases under CECL. The adoption of CECL also resulted in an increase in the liability of unfunded commitments of $0.8 million. For other assets in scope of the standard such as held-to-maturity debt securities and trade and other receivables, the impact from this ASU was inconsequential. The cumulative tax effected adjustment to record ACL and to increase the unfunded commitments liability resulted in a reduction to retained earnings of $8.4 million along with $2.5 million attributable to noncontrolling interests. Post adoption, as loans and leases are added to the portfolio, the Company expects higher levels of ACL determined by CECL assumptions, resulted in accelerated recognition of provision for credit losses, as compared to historical results. In response to the COVID-19 pandemic, regulatory agencies have published a final rule that provides the option to delay the cumulative effect of the day 1 impact to CECL adoption on regulatory capital for two years, followed by a three-year phase in period. Management has elected this five-year transition period consistent with the final rule. Additional and modified disclosure requirements under CECL are included in Note 5. Securities and Note 6. Loans and Leases, Net.
The Company also adopted the following ASUs on October 1, 2020, none of which had a material impact on the Company’s Condensed Consolidated Financial Statements:
–ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
–ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.
–ASU 2018-17, Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities.
ASUs to be Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU are intended to simplify the accounting for income taxes by removing certain exceptions to the general rules found in Topic 740, Income Taxes. The majority of the amendments are to be applied on a prospective basis. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying Interactions between Topics 321, 323 and 815. This ASU clarifies the interactions between Topic 321, Topic 323 and Topic 815, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Management is currently evaluating the impact of this guidance on the consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions to applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform if certain criteria are met. The amendments include a one-time sale or transfer election of held-to-maturity debt securities impacted by reference rate reform. The amendments in this ASU are effective upon issuance through December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This ASU clarifies that an entity should amortize any premium, if applicable, to the next call date, which is the first date when a call option at a specified price becomes exercisable. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Management is currently evaluating the impact of this guidance on the consolidated financial statements.
10
ASU 2020-10, Codification Improvements. This ASU provides clarification, corrects unintended application of guidance, and makes minor improvements to various Topics that are not expected to have a significant impact on the Company’s current accounting policies and practices. Amendments within this ASU are effective for fiscal years beginning after December 15, 2020.
NOTE 3. SIGNIFICANT EVENTS
COVID-19 Pandemic
The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020. Since the onset of this pandemic, macroeconomic conditions and markets have significantly deteriorated. In response to the impacts of COVID-19, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the CARES Act, the U.S. federal government enacted the Consolidated Appropriations Act of 2021 ("CAA") on December 27, 2020, which provides additional COVID-19 relief to American families and business.
The Company is participating in the Paycheck Protection Program ("PPP"), which is being administered by the Small Business Administration ("SBA"). It is the Company's understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and that a portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. See Note 6. Loans and Leases, Net for further information related to this program.
In response to the COVID-19 pandemic impact on customers, the Company is engaging in more frequent communication with borrowers to better understand their situation and challenges and has been offering credit-worthy borrowers experiencing temporary hardship certain loan and lease modifications ("COVID modifications"), such as payment deferrals, as a result of interagency guidance issued on March 22, 2020 encouraging companies to work with customers impacted by COVID-19. The Company elected to treat COVID modifications on leases as part of the enforceable rights and obligations of the parties under the existing lease contract, resulting in these payment deferrals being treated as variable lease payments under the existing lease versus lease modifications. Additionally, for COVID modifications on loans, the Company adjusted its effective interest rate to reflect the payment deferral modification and continued accruing interest during this period. Short-term modifications made on a good faith basis in response to COVID-19 borrowers whose payments were current prior to any relief, are not to be considered troubled debt restructurings, and will not be considered delinquent so long as they meet their revised obligations in the modification agreement.
11
The table below presents the outstanding balances of active COVID-19 related modifications.
| As of the Period Ended | |||||||||||||||||
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | June 30, 2020 | ||||||||||||||
| National Lending | |||||||||||||||||
| Term lending | $ | 18,321 | $ | 26,559 | $ | 88,227 | |||||||||||
| Asset based lending | 1,124 | 7,924 | 17,657 | ||||||||||||||
| Factoring | — | 18,434 | 20,859 | ||||||||||||||
| Lease financing | 1,637 | 5,896 | 27,310 | ||||||||||||||
| Insurance premium finance | — | 230 | 5,505 | ||||||||||||||
| SBA/USDA | — | 7,724 | 7,724 | ||||||||||||||
| Other commercial finance | — | 69 | 74 | ||||||||||||||
| Commercial finance | 21,082 | 66,836 | 167,356 | ||||||||||||||
| Consumer credit products | 1,210 | 1,574 | 462 | ||||||||||||||
| Other consumer finance | 2,682 | 4,223 | 6,855 | ||||||||||||||
| Consumer finance | 3,892 | 5,797 | 7,317 | ||||||||||||||
| Total National Lending | 24,974 | 72,633 | 174,673 | ||||||||||||||
| Community Banking | |||||||||||||||||
| Commercial real estate and operating | 60,319 | 120,695 | 148,838 | ||||||||||||||
| Consumer one-to-four family real estate and other | — | — | 2,534 | ||||||||||||||
| Total Community Banking | 60,319 | 120,695 | 151,372 | ||||||||||||||
| Total loans and leases | 85,293 | 193,328 | 326,045 | ||||||||||||||
| Rental equipment | — | — | 819 | ||||||||||||||
| Total COVID-19 related modifications | $ | 85,293 | $ | 193,328 | $ | 326,864 | |||||||||||
NOTE 4. DIVESTITURES
During the fiscal year ended September 30, 2020, the Company sold the Bank's Community Bank division, a component of the Company's Corporate segment, to Central Bank, a state-chartered bank headquartered in Storm Lake, Iowa. The sale included $290.5 million of deposits; $268.6 million of loans; $4.9 million of premises, furniture, and equipment; and $1.3 million of other assets and closed February 29, 2020 (the "Closing Date"). The sale resulted in a gain of $19.3 million before tax that was recognized within noninterest income on the Company's Condensed Consolidated Statements of Operations.
The Company entered a servicing agreement with Central Bank for the retained Community Bank loan portfolio that became effective on the Closing Date. The Company recognized $1.1 million and none in servicing fee expense during the three months ended December 31, 2020 and 2019, respectively, and $3.5 million for the fiscal year ended September 30, 2020.
Since the Closing Date, the Company has entered into subsequent loan portfolio sale agreements with Central Bank. The Company sold additional loans from the retained Community Bank portfolio in the amount of $129.8 million and none in the three months ended December 31, 2020 and 2019, respectively, and $135.0 million for the fiscal year ended September 30, 2020. The sales did not result in any significant gains or losses to the Condensed Consolidated Statements of Operations.
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NOTE 5. SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale ("AFS") and held to maturity ("HTM") debt securities are presented below.
| (Dollars in Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||||||||
| At December 31, 2020 | |||||||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||
| SBA securities | $ | 156,929 | $ | 5,255 | $ | (175) | $ | 162,009 | |||||||||||||||
| Obligations of states and political subdivisions | 2,823 | 17 | — | 2,840 | |||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 299,830 | 9,808 | — | 309,638 | |||||||||||||||||||
| Asset-backed securities | 323,589 | 2,752 | (3,465) | 322,876 | |||||||||||||||||||
| Mortgage-backed securities | 418,390 | 12,685 | (314) | 430,761 | |||||||||||||||||||
| Total debt securities AFS | $ | 1,201,561 | $ | 30,517 | $ | (3,954) | $ | 1,228,124 | |||||||||||||||
| (Dollars in Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||||||||
| At September 30, 2020 | |||||||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||
| SBA securities | $ | 159,722 | $ | 5,391 | $ | (158) | $ | 164,955 | |||||||||||||||
| Obligations of states and political subdivisions | 825 | 16 | — | 841 | |||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 314,819 | 8,978 | (23) | 323,774 | |||||||||||||||||||
| Asset-backed securities | 329,139 | 2,015 | (6,229) | 324,925 | |||||||||||||||||||
| Mortgage-backed securities | 439,879 | 14,567 | (839) | 453,607 | |||||||||||||||||||
| Total debt securities AFS | $ | 1,244,384 | $ | 30,967 | $ | (7,249) | $ | 1,268,102 | |||||||||||||||
| (Dollars in Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||||||||||||
| At December 31, 2020 | |||||||||||||||||||||||
| Debt securities HTM | |||||||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | $ | 76,176 | $ | 1,414 | $ | — | $ | 77,590 | |||||||||||||||
| Mortgage-backed securities | 5,152 | 185 | — | 5,337 | |||||||||||||||||||
| Total debt securities HTM | $ | 81,328 | $ | 1,599 | $ | — | $ | 82,927 | |||||||||||||||
| (Dollars in Thousands) | Amortized Cost | Gross Unrealized Gain | Gross Unrealized (Losses) | Fair Value | |||||||||||||||||||
| At September 30, 2020 | |||||||||||||||||||||||
| Debt securities HTM | |||||||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | $ | 87,183 | $ | 1,040 | $ | (29) | $ | 88,194 | |||||||||||||||
| Mortgage-backed securities | 5,427 | 124 | — | 5,551 | |||||||||||||||||||
| Total debt securities HTM | $ | 92,610 | $ | 1,164 | $ | (29) | $ | 93,745 | |||||||||||||||
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Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, were as follows:
| LESS THAN 12 MONTHS | OVER 12 MONTHS | TOTAL | |||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | |||||||||||||||||||||||||||||
At December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||||||||||||||
| SBA securities | $ | 40,938 | $ | (81) | $ | 18,623 | $ | (94) | $ | 59,561 | $ | (175) | |||||||||||||||||||||||
| Asset-backed securities | 60,713 | (136) | 200,240 | (3,329) | 260,953 | (3,465) | |||||||||||||||||||||||||||||
| Mortgage-backed securities | 62,494 | (314) | — | — | 62,494 | (314) | |||||||||||||||||||||||||||||
| Total debt securities AFS | $ | 164,145 | $ | (531) | $ | 218,863 | $ | (3,423) | $ | 383,008 | $ | (3,954) | |||||||||||||||||||||||
| LESS THAN 12 MONTHS | OVER 12 MONTHS | TOTAL | |||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | |||||||||||||||||||||||||||||
| At September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||||||||||||||
| SBA securities | $ | 32,257 | $ | (102) | $ | 9,875 | $ | (56) | $ | 42,132 | $ | (158) | |||||||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 6,265 | (6) | 3,103 | (17) | 9,368 | (23) | |||||||||||||||||||||||||||||
| Asset-backed securities | 106,474 | (1,089) | 178,686 | (5,140) | 285,160 | (6,229) | |||||||||||||||||||||||||||||
| Mortgage-backed securities | 138,338 | (839) | — | — | 138,338 | (839) | |||||||||||||||||||||||||||||
| Total debt securities AFS | $ | 283,334 | $ | (2,036) | $ | 191,664 | $ | (5,213) | $ | 474,998 | $ | (7,249) | |||||||||||||||||||||||
There were no debt securities HTM with a continuous loss position at December 31, 2020.
| LESS THAN 12 MONTHS | OVER 12 MONTHS | TOTAL | |||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | Fair Value | Unrealized (Losses) | |||||||||||||||||||||||||||||
| At September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Debt securities HTM | |||||||||||||||||||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 7,397 | (9) | 3,637 | (20) | 11,034 | (29) | |||||||||||||||||||||||||||||
| Total debt securities HTM | $ | 7,397 | $ | (9) | $ | 3,637 | $ | (20) | $ | 11,034 | $ | (29) | |||||||||||||||||||||||
The adoption of CECL was inconsequential to debt securities AFS. At December 31, 2020, there was no ACL for debt securities AFS. At December 31, 2020, there were 27 securities AFS in an unrealized loss position. Management assessed each investment security with unrealized losses for credit impairment and determined substantially all unrealized losses on these securities were due to credit spreads and interest rates versus credit impairment. As part of that assessment, management evaluated and concluded that it is more-likely-than-not that the Company will not be required and does not intend to sell any of the securities prior to recovery of the amortized cost.
The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features that allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities ("MBS") because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, MBS are not included in the maturity categories in the following maturity summary. The expected maturities of certain SBA securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
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| Securities AFS at Fair Value | Amortized Cost | Fair Value | |||||||||
| (Dollars in Thousands) | |||||||||||
| At December 31, 2020 | |||||||||||
| Due in one year or less | $ | 720 | $ | 724 | |||||||
| Due after one year through five years | 22,799 | 23,707 | |||||||||
| Due after five years through ten years | 32,099 | 33,738 | |||||||||
| Due after ten years | 727,553 | 739,194 | |||||||||
| 783,171 | 797,363 | ||||||||||
| Mortgage-backed securities | 418,390 | 430,761 | |||||||||
| Total securities AFS, at fair value | $ | 1,201,561 | $ | 1,228,124 | |||||||
| (Dollars in Thousands) | Amortized Cost | Fair Value | |||||||||
| At September 30, 2020 | |||||||||||
| Due in one year or less | $ | 1,385 | $ | 1,398 | |||||||
| Due after one year through five years | 20,805 | 21,769 | |||||||||
| Due after five years through ten years | 32,441 | 34,025 | |||||||||
| Due after ten years | 749,874 | 757,303 | |||||||||
| 804,505 | 814,495 | ||||||||||
| Mortgage-backed securities | 439,879 | 453,607 | |||||||||
| Total securities AFS, at fair value | $ | 1,244,384 | $ | 1,268,102 | |||||||
| Securities HTM at Fair Value | Amortized Cost | Fair Value | |||||||||
| (Dollars in Thousands) | |||||||||||
| At December 31, 2020 | |||||||||||
| Due after ten years | $ | 76,176 | $ | 77,590 | |||||||
| 76,176 | 77,590 | ||||||||||
| Mortgage-backed securities | 5,152 | 5,337 | |||||||||
| Total securities HTM, at cost | $ | 81,328 | $ | 82,927 | |||||||
| (Dollars in Thousands) | Amortized Cost | Fair Value | |||||||||
| At September 30, 2020 | |||||||||||
| Due after ten years | $ | 87,183 | $ | 88,194 | |||||||
| 87,183 | 88,194 | ||||||||||
| Mortgage-backed securities | 5,427 | 5,551 | |||||||||
| Total securities HTM, at cost | $ | 92,610 | $ | 93,745 | |||||||
Other investments, at cost, include equity securities without a readily determinable fair value, which are included in other assets on the Condensed Consolidated Statements of Financial Condition, and shares of stock in the Federal Reserve Bank (the "FRB") of Minneapolis and the FHLB of Des Moines.
Equity Securities
Equity securities without a readily determinable fair value totaled $13.7 million at December 31, 2020 and $11.0 million at September 30, 2020.
15
FRB Stock
The Bank is required by federal law to subscribe to capital stock (divided into shares of $100 each) as a member of the FRB of Minneapolis with an amount equal to six per centum of the paid-up capital stock and surplus. One-half of the subscription is paid at time of application, and one-half is subject to call of the Board of Governors of the Federal Reserve System. FRB of Minneapolis stock held by the Bank totaled $19.7 million at December 31, 2020 and September 30, 2020. These equity securities are 'restricted' in that they can only be owned by member banks.
FHLB Stock
The Company's borrowings from the FHLB are secured by a blanket collateral agreement with respect to a percentage of unencumbered loans and the pledge of specific investment securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.
The investments in the FHLB stock are required investments related to the Company's membership in and current borrowings from the FHLB of Des Moines. The investments in the FHLB of Des Moines could be adversely impacted by the financial operations of the FHLB and actions of their regulator, the Federal Housing Finance Agency.
The FHLB stock is carried at cost since it is generally redeemable at par value. The carrying value of the stock held at the FHLB was $7.5 million at December 31, 2020 and September 30, 2020. The absence of change in FHLB stock directly correlates with no short-term borrowings balances at both December 31, 2020 and September 30, 2020.
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, FRB and FHLB stocks are 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. There was a $0.9 million impairment recognized for such investments for the three months ended December 31, 2020.
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NOTE 6. LOANS AND LEASES, NET
Loans and leases consist of the following:
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | |||||||||
| National Lending | |||||||||||
| Term lending | $ | 881,306 | $ | 805,323 | |||||||
| Asset based lending | 242,298 | 182,419 | |||||||||
| Factoring | 275,650 | 281,173 | |||||||||
| Lease financing | 283,722 | 281,084 | |||||||||
| Insurance premium finance | 338,227 | 337,940 | |||||||||
| SBA/USDA | 300,707 | 318,387 | |||||||||
| Other commercial finance | 101,209 | 101,658 | |||||||||
| Commercial finance | 2,423,119 | 2,307,984 | |||||||||
| Consumer credit products | 88,595 | 89,809 | |||||||||
| Other consumer finance | 162,423 | 134,342 | |||||||||
| Consumer finance | 251,018 | 224,151 | |||||||||
| Tax services | 92,548 | 3,066 | |||||||||
| Warehouse finance | 318,937 | 293,375 | |||||||||
| Total National Lending | 3,085,622 | 2,828,576 | |||||||||
| Community Banking | |||||||||||
| Commercial real estate and operating | 339,141 | 457,371 | |||||||||
| Consumer one-to-four family real estate and other | 5,077 | 16,486 | |||||||||
| Agricultural real estate and operating | 9,724 | 11,707 | |||||||||
| Total Community Banking | 353,942 | 485,564 | |||||||||
| Total loans and leases | 3,439,564 | 3,314,140 | |||||||||
| Net deferred loan origination fees (costs) | 9,111 | 8,625 | |||||||||
| Total gross loans and leases | 3,448,675 | 3,322,765 | |||||||||
| Allowance for credit losses | (72,389) | (56,188) | |||||||||
| Total loans and leases, net | $ | 3,376,286 | $ | 3,266,577 | |||||||
During the three months ended December 31, 2020, the Company transferred $100.4 million of Community Banking loans to held for sale. During the three months ended December 31, 2019, the Company transferred $251.9 million of Community Banking loans to held for sale.
During the three months ended December 31, 2020 and 2019, the Company originated $303.5 million of other consumer finance, SBA/USDA, and consumer credit product loans as held for sale and $16.2 million of SBA/USDA and consumer credit product loans as held for sale, respectively.
The Company sold held for sale loans resulting in proceeds of $451.7 million and gains on sale of $3.5 million during the three months ended December 31, 2020. The Company sold held for sale loans resulting in proceeds of $143.0 million and gains on sale of $1.9 million during the three months ended December 31, 2019.
17
Loans purchased and sold by portfolio segment, including participation interests, for the three months ended were as follows:
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Loans Purchased | |||||||||||
| Loans held for investment: | |||||||||||
| Total National Lending | $ | 62,631 | $ | 14,464 | |||||||
| Total Community Banking | 2,299 | 4,349 | |||||||||
| Total purchases | $ | 64,930 | $ | 18,813 | |||||||
| Loans Sold | |||||||||||
| Loans held for sale: | |||||||||||
| Total National Lending | $ | 321,864 | $ | 143,035 | |||||||
| Total Community Banking | 129,788 | — | |||||||||
| Loans held for investment: | |||||||||||
| Total Community Banking | — | 3,099 | |||||||||
| Total sales | $ | 451,652 | $ | 146,134 | |||||||
Leasing Portfolio. The net investment in direct financing and sales-type leases was comprised of the following:
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | |||||||||
| Carrying Amount | $ | 300,748 | $ | 299,487 | |||||||
| Unguaranteed residual assets | 17,488 | 17,203 | |||||||||
| Unamortized initial direct costs | 2,056 | 2,078 | |||||||||
| Unearned income | (34,514) | (35,606) | |||||||||
| Total net investment in direct financing and sales-type leases | $ | 285,778 | $ | 283,162 | |||||||
The carrying amount of direct financing and sales-type leases subject to residual value guarantees was $8.4 million at December 31, 2020.
The components of total lease income were as follows:
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Interest income - loans and leases | |||||||||||
| Interest income on net investments in direct financing and sales-type leases | $ | 5,319 | $ | 4,087 | |||||||
| Leasing and equipment finance noninterest income | |||||||||||
| Lease income from operating lease payments | 10,041 | 11,203 | |||||||||
| Profit (loss) recorded on commencement date on sales-type leases | 71 | 471 | |||||||||
Other(1) | 69 | 750 | |||||||||
| Total leasing and equipment finance noninterest income | 10,181 | 12,424 | |||||||||
| Total lease income | $ | 15,500 | $ | 16,511 | |||||||
(1) Other leasing and equipment finance noninterest income consists of gains (losses) on sales of leased equipment, fees and service charges on leases and gains (losses) on sales of leases.
18
Undiscounted future minimum lease payments receivable for direct financing and sales-type leases and a reconciliation to the carrying amount recorded were as follows:
| (Dollars in Thousands) | December 31, 2020 | ||||
| Remaining in 2021 | $ | 85,352 | |||
| 2022 | 95,224 | ||||
| 2023 | 66,168 | ||||
| 2024 | 36,759 | ||||
| 2025 | 13,669 | ||||
| Thereafter | 3,576 | ||||
| Equipment under leases not yet commenced | — | ||||
| Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases | 300,748 | ||||
| Third-party residual value guarantees | — | ||||
| Total carrying amount of direct financing and sales-type leases | $ | 300,748 | |||
The Company did not record any contingent rental income from direct financing and sales-type leases in the three months ended December 31, 2020.
During the Company's fiscal 2020 second quarter, the COVID-19 pandemic began impacting global and US markets and macroeconomic conditions, and continues to have an impact. Although the ultimate impact of the pandemic on the Company's loan and lease portfolio continues to be difficult to predict, management continues to evaluate the loan and lease portfolio in order to assess the impact on repayment sources and underlying collateral that could result in additional losses and continues to assess the impact to our customers and businesses as a result of COVID-19 and will refine our estimate as more information becomes available.
Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and related ASUs on a modified retrospective basis. Financial information at and for the quarter ended December 31, 2020 is reflected as such. The historical information disclosed is in accordance with Topic 310.
19
Activity in the allowance for credit losses and balances of loans and leases by portfolio segment for each of the three months ended was as follows:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Beginning Balance | Impact of CECL Adoption | Provision (Recovery) for Credit Losses(2) | Charge-offs | Recoveries | Ending Balance | |||||||||||||||||||||||||||||
| Allowance for credit losses: | |||||||||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||||||||
| Term lending | $ | 15,211 | $ | 9,999 | $ | 6,026 | $ | (3,312) | $ | 296 | $ | 28,220 | |||||||||||||||||||||||
| Asset based lending | 1,406 | 164 | 839 | (600) | — | 1,809 | |||||||||||||||||||||||||||||
| Factoring | 3,027 | 987 | (1,416) | (1) | 1,122 | 3,719 | |||||||||||||||||||||||||||||
| Lease financing | 7,023 | (556) | 1,112 | (876) | 81 | 6,784 | |||||||||||||||||||||||||||||
| Insurance premium finance | 2,129 | (965) | 488 | (656) | 289 | 1,285 | |||||||||||||||||||||||||||||
| SBA/USDA | 940 | 2,720 | (497) | — | 1 | 3,164 | |||||||||||||||||||||||||||||
| Other commercial finance | 182 | 364 | (67) | — | — | 479 | |||||||||||||||||||||||||||||
| Commercial finance | 29,918 | 12,713 | 6,485 | (5,445) | 1,789 | 45,460 | |||||||||||||||||||||||||||||
| Consumer credit products | 845 | — | (10) | — | — | 835 | |||||||||||||||||||||||||||||
| Other consumer finance | 2,821 | 5,998 | 1,482 | (218) | 93 | 10,176 | |||||||||||||||||||||||||||||
| Consumer finance | 3,666 | 5,998 | 1,472 | (218) | 93 | 11,011 | |||||||||||||||||||||||||||||
| Tax services | 2 | — | 454 | — | 956 | 1,412 | |||||||||||||||||||||||||||||
| Warehouse finance | 294 | (1) | 26 | — | — | 319 | |||||||||||||||||||||||||||||
| Total National Lending | 33,880 | 18,710 | 8,437 | (5,663) | 2,838 | 58,202 | |||||||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||||||||
| Commercial real estate and operating | 21,867 | (5,616) | (2,119) | (11) | — | 14,121 | |||||||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | 298 | (247) | (32) | — | — | 19 | |||||||||||||||||||||||||||||
| Agricultural real estate and operating | 143 | (74) | (22) | — | — | 47 | |||||||||||||||||||||||||||||
| Total Community Banking | 22,308 | (5,937) | (2,173) | (11) | — | 14,187 | |||||||||||||||||||||||||||||
| Total loans and leases | 56,188 | 12,773 | 6,264 | (5,674) | 2,838 | 72,389 | |||||||||||||||||||||||||||||
Unfunded commitments(1) | 32 | 831 | (175) | — | — | 688 | |||||||||||||||||||||||||||||
| Total | $ | 56,220 | $ | 13,604 | $ | 6,089 | $ | (5,674) | $ | 2,838 | $ | 73,077 | |||||||||||||||||||||||
(1) Reserve for unfunded commitments is recognized within other liabilities on the Consolidated Statement of Financial Condition.
(2) As a result of the adoption of CECL, effective October 1, 2020, the provision for credit losses includes the provision for unfunded commitments that was previously included within other noninterest expense.
20
| Three Months Ended December 31, 2019 | |||||||||||||||||||||||||||||
| (Dollars in Thousands) | Beginning Balance | Provision (Recovery) for Loan and Lease Losses | Charge-offs | Recoveries | Ending Balance | ||||||||||||||||||||||||
| Allowance for loan and lease losses: | |||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||
| Term lending | $ | 5,533 | $ | 3,401 | $ | (2,295) | $ | 111 | $ | 6,750 | |||||||||||||||||||
| Asset based lending | 2,437 | (461) | — | 19 | 1,995 | ||||||||||||||||||||||||
| Factoring | 3,261 | 257 | (389) | 419 | 3,548 | ||||||||||||||||||||||||
| Lease financing | 1,275 | 504 | (215) | 131 | 1,695 | ||||||||||||||||||||||||
| Insurance premium finance | 1,024 | 141 | (285) | 90 | 970 | ||||||||||||||||||||||||
| SBA/USDA | 383 | 382 | — | — | 765 | ||||||||||||||||||||||||
| Other commercial finance | 683 | (523) | — | — | 160 | ||||||||||||||||||||||||
| Commercial finance | 14,596 | 3,701 | (3,184) | 770 | 15,883 | ||||||||||||||||||||||||
| Consumer credit products | 1,044 | 63 | — | — | 1,107 | ||||||||||||||||||||||||
| Other consumer finance | 5,118 | 476 | (734) | 29 | 4,889 | ||||||||||||||||||||||||
| Consumer finance | 6,162 | 539 | (734) | 29 | 5,996 | ||||||||||||||||||||||||
| Tax services | — | 911 | — | 739 | 1,650 | ||||||||||||||||||||||||
| Warehouse finance | 263 | 6 | — | — | 269 | ||||||||||||||||||||||||
| Total National Lending | 21,021 | 5,157 | (3,918) | 1,538 | 23,798 | ||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||
| Commercial real estate and operating | 6,208 | (1,543) | — | — | 4,665 | ||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | 1,053 | (22) | — | — | 1,031 | ||||||||||||||||||||||||
| Agricultural real estate and operating | 867 | (185) | — | — | 682 | ||||||||||||||||||||||||
| Total Community Banking | 8,218 | (1,750) | — | — | 6,378 | ||||||||||||||||||||||||
| Total | $ | 29,149 | $ | 3,407 | $ | (3,918) | $ | 1,538 | $ | 30,176 | |||||||||||||||||||
21
The following tables provide additional disclosures previously required by ASC Topic 310 related to the Company's September 30, 2020 balances.
| Allowance | Loans and Leases | ||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | 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 | |||||||||||||||||||||||||||||
| Recorded Investment | |||||||||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||||||||
| Term lending | $ | 3,155 | $ | 12,056 | $ | 15,211 | $ | 26,085 | $ | 779,238 | $ | 805,323 | |||||||||||||||||||||||
| Asset based lending | 355 | 1,051 | 1,406 | 5,317 | 177,102 | 182,419 | |||||||||||||||||||||||||||||
| Factoring | 274 | 2,753 | 3,027 | 5,071 | 276,102 | 281,173 | |||||||||||||||||||||||||||||
| Lease financing | 1,194 | 5,829 | 7,023 | 4,697 | 276,387 | 281,084 | |||||||||||||||||||||||||||||
| Insurance premium finance | — | 2,129 | 2,129 | — | 337,940 | 337,940 | |||||||||||||||||||||||||||||
| SBA/USDA | — | 940 | 940 | 1,436 | 316,951 | 318,387 | |||||||||||||||||||||||||||||
| Other commercial finance | — | 182 | 182 | — | 101,658 | 101,658 | |||||||||||||||||||||||||||||
| Commercial finance | 4,978 | 24,940 | 29,918 | 42,606 | 2,265,378 | 2,307,984 | |||||||||||||||||||||||||||||
| Consumer credit products | — | 845 | 845 | — | 89,809 | 89,809 | |||||||||||||||||||||||||||||
| Other consumer finance | — | 2,821 | 2,821 | 1,987 | 132,355 | 134,342 | |||||||||||||||||||||||||||||
| Consumer finance | — | 3,666 | 3,666 | 1,987 | 222,164 | 224,151 | |||||||||||||||||||||||||||||
| Tax services | — | 2 | 2 | — | 3,066 | 3,066 | |||||||||||||||||||||||||||||
| Warehouse finance | — | 294 | 294 | — | 293,375 | 293,375 | |||||||||||||||||||||||||||||
| Total National Lending | 4,978 | 28,902 | 33,880 | 44,593 | 2,783,983 | 2,828,576 | |||||||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||||||||
| Commercial real estate and operating | 141 | 21,726 | 21,867 | 160 | 457,211 | 457,371 | |||||||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | — | 298 | 298 | 104 | 16,382 | 16,486 | |||||||||||||||||||||||||||||
| Agricultural real estate and operating | — | 143 | 143 | 6,421 | 5,286 | 11,707 | |||||||||||||||||||||||||||||
| Total Community Banking | 141 | 22,167 | 22,308 | 6,685 | 478,879 | 485,564 | |||||||||||||||||||||||||||||
| Total | $ | 5,119 | $ | 51,069 | $ | 56,188 | $ | 51,278 | $ | 3,262,862 | $ | 3,314,140 | |||||||||||||||||||||||
Information on impaired loans and leases, all of which are deemed to be collateral dependent and are evaluated individually for the ACL, as of December 31, 2020 was as follows:
| (Dollars in Thousands) | December 31, 2020 | ||||
| National Lending | |||||
| Term lending | $ | 12,879 | |||
| Asset based lending | 908 | ||||
| Factoring | 842 | ||||
| Lease financing | 2,420 | ||||
| SBA/USDA | 600 | ||||
| Commercial finance | 17,649 | ||||
| Total National Lending | 17,649 | ||||
| Community Banking | |||||
| Commercial real estate and operating | 18,456 | ||||
| Consumer one-to-four family real estate and other | 173 | ||||
| Agricultural real estate and operating | 6,343 | ||||
| Total Community Banking | 24,972 | ||||
| Total | $ | 42,621 | |||
22
Information on impaired loans and leases as of September 30, 2020 was as follows:
| (Dollars in Thousands) | Recorded Balance | Unpaid Principal Balance | Specific Allowance | ||||||||||||||
| Loans and leases without a specific valuation allowance | |||||||||||||||||
| National Lending | |||||||||||||||||
| Term lending | $ | 17,349 | $ | 18,823 | $ | — | |||||||||||
| Asset based lending | 3,914 | 3,914 | — | ||||||||||||||
| Factoring | 3,892 | 4,967 | — | ||||||||||||||
| Lease financing | 1,797 | 1,805 | — | ||||||||||||||
| SBA/USDA | 1,436 | 2,263 | — | ||||||||||||||
| Commercial finance | 28,388 | 31,772 | — | ||||||||||||||
| Other consumer finance | 1,987 | 2,104 | — | ||||||||||||||
| Consumer finance | 1,987 | 2,104 | — | ||||||||||||||
| Total National Lending | 30,375 | 33,876 | — | ||||||||||||||
| Community Banking | |||||||||||||||||
| Consumer one-to-four family real estate and other | 104 | 104 | — | ||||||||||||||
| Agricultural real estate and operating | 6,421 | 6,421 | — | ||||||||||||||
| Total Community Banking | 6,525 | 6,525 | — | ||||||||||||||
| Total | $ | 36,900 | $ | 40,401 | $ | — | |||||||||||
| Loans and leases with a specific valuation allowance | |||||||||||||||||
| National Lending | |||||||||||||||||
| Term lending | $ | 8,736 | $ | 8,736 | $ | 3,155 | |||||||||||
| Asset based lending | 1,403 | 1,403 | 355 | ||||||||||||||
| Factoring | 1,179 | 1,191 | 274 | ||||||||||||||
| Lease financing | 2,900 | 2,900 | 1,194 | ||||||||||||||
| Commercial finance | 14,218 | 14,230 | 4,978 | ||||||||||||||
| Total National Lending | 14,218 | 14,230 | 4,978 | ||||||||||||||
| Community Banking | |||||||||||||||||
| Commercial real estate and operating | 160 | 160 | 141 | ||||||||||||||
| Total Community Banking Loans | 160 | 160 | 141 | ||||||||||||||
| Total | $ | 14,378 | $ | 14,390 | $ | 5,119 | |||||||||||
In response to the ongoing COVID-19 pandemic, the Company allowed modifications, such as payment deferrals and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. Accordingly, if all payments were less than 30 days past due prior to the onset of the pandemic effects, the loan or lease will not be reported as past due during the deferral or forbearance period. As of December 31, 2020, $84.2 million of loan and lease balances that were granted deferral payments by the Company were still in their deferment period due to performing borrowers experiencing temporary hardship from COVID-19. These modifications consisted solely of payment deferrals ranging from 30 days to six months. These modifications are in line with applicable regulatory guidelines and, therefore, they are not reported as troubled-debt restructurings. The Company elected to accrue and recognize interest income on these modifications during the payment deferral period.
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.
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.”
23
The Company has various portfolios of consumer finance and tax services loans that present unique risks. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The outstanding balances of consumer finance loans and tax services loans were $251.0 million and $92.5 million at December 31, 2020, respectively, and $224.2 million and $3.1 million at September 30, 2020, respectively.
The amortized cost basis of loans and leases by asset classification and year of origination was as follows:
| Amortized Cost Basis | ||||||||||||||||||||||||||
| (Dollars in Thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total | |||||||||||||||||||||||
| As of December 31, 2020 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | ||||||||||||||||||||
| Term lending | ||||||||||||||||||||||||||
| Pass | $ | 107,414 | $ | 321,578 | $ | 130,293 | $ | 68,889 | $ | 46,776 | $ | 123,244 | $ | — | $ | 798,194 | ||||||||||
| Watch | 718 | 4,081 | 8,058 | 915 | 3,850 | 11,660 | — | 29,282 | ||||||||||||||||||
| Special Mention | — | 6,322 | 4,220 | 1,332 | 269 | 2,101 | — | 14,244 | ||||||||||||||||||
| Substandard | 1,092 | 14,147 | 12,326 | 7,691 | — | 1,766 | — | 37,022 | ||||||||||||||||||
| Doubtful | — | 1,264 | 832 | 456 | — | 12 | — | 2,564 | ||||||||||||||||||
| Total | 109,224 | 347,392 | 155,729 | 79,283 | 50,895 | 138,783 | — | 881,306 | ||||||||||||||||||
| Asset based lending | ||||||||||||||||||||||||||
| Pass | — | — | — | — | — | — | 147,064 | 147,064 | ||||||||||||||||||
| Watch | — | — | — | — | — | — | 73,402 | 73,402 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | 19,750 | 19,750 | ||||||||||||||||||
| Substandard | — | — | — | — | — | — | 2,082 | 2,082 | ||||||||||||||||||
| Total | — | — | — | — | — | — | 242,298 | 242,298 | ||||||||||||||||||
| Factoring | ||||||||||||||||||||||||||
| Pass | — | — | — | — | — | — | 217,566 | 217,566 | ||||||||||||||||||
| Watch | — | — | — | — | — | — | 31,257 | 31,257 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | 18,779 | 18,779 | ||||||||||||||||||
| Substandard | — | — | — | — | — | — | 8,048 | 8,048 | ||||||||||||||||||
| Total | — | — | — | — | — | — | 275,650 | 275,650 | ||||||||||||||||||
| Lease financing | ||||||||||||||||||||||||||
| Pass | 32,970 | 161,904 | 51,762 | 16,780 | 1,282 | 2,297 | — | 266,995 | ||||||||||||||||||
| Watch | 132 | 6,619 | 236 | 954 | 272 | 55 | — | 8,268 | ||||||||||||||||||
| Special Mention | — | 2,048 | 1,295 | 213 | — | — | — | 3,556 | ||||||||||||||||||
| Substandard | — | 288 | 3,585 | 277 | 3 | 496 | — | 4,649 | ||||||||||||||||||
| Doubtful | — | 51 | 114 | 89 | — | — | — | 254 | ||||||||||||||||||
| Total | 33,102 | 170,910 | 56,992 | 18,313 | 1,557 | 2,848 | — | 283,722 | ||||||||||||||||||
| Insurance premium finance | ||||||||||||||||||||||||||
| Pass | 173,400 | 164,238 | 41 | — | — | — | — | 337,679 | ||||||||||||||||||
| Watch | — | 127 | 3 | — | — | — | — | 130 | ||||||||||||||||||
| Special Mention | — | 175 | 2 | — | — | — | — | 177 | ||||||||||||||||||
| Substandard | — | 135 | 21 | — | — | — | — | 156 | ||||||||||||||||||
| Doubtful | — | 83 | 2 | — | — | — | — | 85 | ||||||||||||||||||
| Total | 173,400 | 164,758 | 69 | — | — | — | — | 338,227 | ||||||||||||||||||
| SBA/USDA | ||||||||||||||||||||||||||
| Pass | 724 | 222,726 | 25,001 | 22,946 | 9,505 | 5,025 | — | 285,927 | ||||||||||||||||||
| Watch | — | 6,811 | 643 | 457 | 1,381 | 966 | — | 10,258 | ||||||||||||||||||
| Special Mention | — | — | — | 1,823 | — | 73 | — | 1,896 | ||||||||||||||||||
| Substandard | — | — | — | 1,209 | 703 | 714 | — | 2,626 | ||||||||||||||||||
| Total | 724 | 229,537 | 25,644 | 26,435 | 11,589 | 6,778 | — | 300,707 | ||||||||||||||||||
24
| Other commercial finance | ||||||||||||||||||||||||||
| Pass | 2,450 | 4,841 | 8,183 | 4,080 | 4,137 | 74,263 | — | 97,954 | ||||||||||||||||||
| Watch | 867 | — | — | — | — | 2,107 | — | 2,974 | ||||||||||||||||||
| Special Mention | — | — | — | — | — | — | — | — | ||||||||||||||||||
| Substandard | — | 281 | — | — | — | — | — | 281 | ||||||||||||||||||
| Total | 3,317 | 5,122 | 8,183 | 4,080 | 4,137 | 76,370 | — | 101,209 | ||||||||||||||||||
| Warehouse finance | ||||||||||||||||||||||||||
| Pass | — | — | — | — | — | — | 318,937 | 318,937 | ||||||||||||||||||
| Total | — | — | — | — | — | — | 318,937 | 318,937 | ||||||||||||||||||
| Total National Lending | ||||||||||||||||||||||||||
| Pass | 316,958 | 875,287 | 215,280 | 112,695 | 61,700 | 204,829 | 683,567 | 2,470,316 | ||||||||||||||||||
| Watch | 1,717 | 17,638 | 8,940 | 2,326 | 5,503 | 14,788 | 104,659 | 155,571 | ||||||||||||||||||
| Special Mention | — | 8,545 | 5,517 | 3,368 | 269 | 2,174 | 38,529 | 58,402 | ||||||||||||||||||
| Substandard | 1,092 | 14,851 | 15,932 | 9,177 | 706 | 2,976 | 10,130 | 54,864 | ||||||||||||||||||
| Doubtful | — | 1,398 | 948 | 545 | — | 12 | — | 2,903 | ||||||||||||||||||
| Total | 319,767 | 917,719 | 246,617 | 128,111 | 68,178 | 224,779 | 836,885 | 2,742,056 | ||||||||||||||||||
| Commercial real estate and operating | ||||||||||||||||||||||||||
| Pass | — | 10,122 | 99,181 | 75,915 | 32,338 | 50 | 300 | 217,906 | ||||||||||||||||||
| Watch | — | — | 8,046 | 57,291 | 28,157 | 6,593 | — | 100,087 | ||||||||||||||||||
| Special Mention | — | 926 | — | — | — | 1,455 | — | 2,381 | ||||||||||||||||||
| Substandard | — | 300 | 700 | 16,896 | — | 311 | — | 18,207 | ||||||||||||||||||
| Doubtful | — | — | 560 | — | — | — | — | 560 | ||||||||||||||||||
| Total | — | 11,348 | 108,487 | 150,102 | 60,495 | 8,409 | 300 | 339,141 | ||||||||||||||||||
| Consumer 1-4 family real estate and other | ||||||||||||||||||||||||||
| Pass | — | — | 161 | 645 | 381 | 2,940 | 8 | 4,135 | ||||||||||||||||||
| Watch | — | — | — | 236 | — | — | — | 236 | ||||||||||||||||||
| Special Mention | — | — | — | — | 139 | 66 | 206 | 411 | ||||||||||||||||||
| Substandard | — | — | 111 | — | 41 | 143 | — | 295 | ||||||||||||||||||
| Total | — | — | 272 | 881 | 561 | 3,149 | 214 | 5,077 | ||||||||||||||||||
| Agricultural real estate and other | ||||||||||||||||||||||||||
| Pass | — | — | 85 | — | — | — | — | 85 | ||||||||||||||||||
| Watch | — | 1,583 | — | — | — | — | — | 1,583 | ||||||||||||||||||
| Special Mention | — | — | — | 111 | — | 2,694 | — | 2,805 | ||||||||||||||||||
| Substandard | — | 3,394 | — | 913 | — | 594 | 350 | 5,251 | ||||||||||||||||||
| Total | — | 4,977 | 85 | 1,024 | — | 3,288 | 350 | 9,724 | ||||||||||||||||||
| Total Community Bank | ||||||||||||||||||||||||||
| Pass | — | 10,122 | 99,427 | 76,560 | 32,719 | 2,990 | 308 | 222,126 | ||||||||||||||||||
| Watch | — | 1,583 | 8,046 | 57,527 | 28,157 | 6,593 | — | 101,906 | ||||||||||||||||||
| Special Mention | — | 926 | — | 111 | 139 | 4,215 | 206 | 5,597 | ||||||||||||||||||
| Substandard | — | 3,694 | 811 | 17,809 | 41 | 1,048 | 350 | 23,753 | ||||||||||||||||||
| Doubtful | — | — | 560 | — | — | — | — | 560 | ||||||||||||||||||
| Total | — | 16,325 | 108,844 | 152,007 | 61,056 | 14,846 | 864 | 353,942 | ||||||||||||||||||
| Total Loans and Leases | ||||||||||||||||||||||||||
| Pass | 316,958 | 885,409 | 314,707 | 189,255 | 94,419 | 207,819 | 683,875 | 2,692,442 | ||||||||||||||||||
| Watch | 1,717 | 19,221 | 16,986 | 59,853 | 33,660 | 21,381 | 104,659 | 257,477 | ||||||||||||||||||
| Special Mention | — | 9,471 | 5,517 | 3,479 | 408 | 6,389 | 38,735 | 63,999 | ||||||||||||||||||
| Substandard | 1,092 | 18,545 | 16,743 | 26,986 | 747 | 4,024 | 10,480 | 78,617 | ||||||||||||||||||
| Doubtful | — | 1,398 | 1,508 | 545 | — | 12 | — | 3,463 | ||||||||||||||||||
| Total | $ | 319,767 | $ | 934,044 | $ | 355,461 | $ | 280,118 | $ | 129,234 | $ | 239,625 | $ | 837,749 | $ | 3,095,998 | ||||||||||
25
The recorded investment of loans and leases by asset classification was as follows:
| Asset Classification | Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||
| As of September 30, 2020 | (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||||||||
| Term lending | $ | 725,101 | $ | 29,637 | $ | 24,501 | $ | 21,249 | $ | 4,835 | $ | 805,323 | |||||||||||||||||||||||
| Asset based lending | 102,013 | 62,512 | 12,577 | 5,317 | — | 182,419 | |||||||||||||||||||||||||||||
| Factoring | 217,245 | 45,200 | 13,657 | 5,071 | — | 281,173 | |||||||||||||||||||||||||||||
| Lease financing | 264,700 | 8,879 | 2,808 | 4,148 | 549 | 281,084 | |||||||||||||||||||||||||||||
| Insurance premium finance | 336,364 | 284 | 222 | 701 | 369 | 337,940 | |||||||||||||||||||||||||||||
| SBA/USDA | 308,549 | 8,328 | 74 | 1,436 | — | 318,387 | |||||||||||||||||||||||||||||
| Other commercial finance | 100,727 | 931 | — | — | — | 101,658 | |||||||||||||||||||||||||||||
| Commercial finance | 2,054,699 | 155,771 | 53,839 | 37,922 | 5,753 | 2,307,984 | |||||||||||||||||||||||||||||
| Warehouse finance | 293,375 | — | — | — | — | 293,375 | |||||||||||||||||||||||||||||
| Total National Lending | 2,348,074 | 155,771 | 53,839 | 37,922 | 5,753 | 2,601,359 | |||||||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||||||||
| Commercial real estate and operating | 336,236 | 98,295 | 4,049 | 18,211 | 580 | 457,371 | |||||||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | 15,648 | 41 | 609 | 188 | — | 16,486 | |||||||||||||||||||||||||||||
| Agricultural real estate and operating | 1,526 | — | 4,930 | 5,251 | — | 11,707 | |||||||||||||||||||||||||||||
| Total Community Banking | 353,410 | 98,336 | 9,588 | 23,650 | 580 | 485,564 | |||||||||||||||||||||||||||||
| Total loans and leases | $ | 2,701,484 | $ | 254,107 | $ | 63,427 | $ | 61,572 | $ | 6,333 | $ | 3,086,923 | |||||||||||||||||||||||
26
Past due loans and leases were as follows:
| Accruing and Nonaccruing Loans and Leases | Nonperforming Loans and Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | 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 | ||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for sale | $ | 165 | $ | — | $ | — | $ | 165 | $ | 133,494 | $ | 133,659 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Term lending | 8,467 | 2,442 | 10,211 | 21,120 | 860,186 | 881,306 | 385 | 13,741 | 14,126 | ||||||||||||||||||||||||||||||||||||||||||||
| Asset based lending | — | — | — | — | 242,298 | 242,298 | — | 917 | 917 | ||||||||||||||||||||||||||||||||||||||||||||
| Factoring | — | — | — | — | 275,650 | 275,650 | — | 842 | 842 | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 11,257 | 4,144 | 3,424 | 18,825 | 264,897 | 283,722 | 1,042 | 2,607 | 3,649 | ||||||||||||||||||||||||||||||||||||||||||||
| Insurance premium finance | 3,349 | 772 | 665 | 4,786 | 333,441 | 338,227 | 665 | — | 665 | ||||||||||||||||||||||||||||||||||||||||||||
| SBA/USDA | 375 | — | 600 | 975 | 299,732 | 300,707 | — | 600 | 600 | ||||||||||||||||||||||||||||||||||||||||||||
| Other commercial finance | — | — | — | — | 101,209 | 101,209 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial finance | 23,448 | 7,358 | 14,900 | 45,706 | 2,377,413 | 2,423,119 | 2,092 | 18,707 | 20,799 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer credit products | 661 | 301 | 457 | 1,419 | 87,176 | 88,595 | 457 | — | 457 | ||||||||||||||||||||||||||||||||||||||||||||
| Other consumer finance | 754 | 103 | 675 | 1,532 | 160,891 | 162,423 | 675 | — | 675 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer finance | 1,415 | 404 | 1,132 | 2,951 | 248,067 | 251,018 | 1,132 | — | 1,132 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax services | — | — | — | — | 92,548 | 92,548 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Warehouse finance | — | — | — | — | 318,937 | 318,937 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total National Lending | 24,863 | 7,762 | 16,032 | 48,657 | 3,036,965 | 3,085,622 | 3,224 | 18,707 | 21,931 | ||||||||||||||||||||||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate and operating | 13 | — | 560 | 573 | 338,568 | 339,141 | — | 18,456 | 18,456 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | — | — | 50 | 50 | 5,027 | 5,077 | — | 164 | 164 | ||||||||||||||||||||||||||||||||||||||||||||
| Agricultural real estate and operating | — | — | 1,769 | 1,769 | 7,955 | 9,724 | — | 1,769 | 1,769 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Community Banking | 13 | — | 2,379 | 2,392 | 351,550 | 353,942 | — | 20,389 | 20,389 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases held for investment | 24,876 | 7,762 | 18,411 | 51,049 | 3,388,515 | 3,439,564 | 3,224 | 39,096 | 42,320 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 25,041 | $ | 7,762 | $ | 18,411 | $ | 51,214 | $ | 3,522,009 | $ | 3,573,223 | $ | 3,224 | $ | 39,096 | $ | 42,320 | |||||||||||||||||||||||||||||||||||
27
| Accruing and Nonaccruing Loans and Leases | Nonperforming Loans and Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | 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 | ||||||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for sale | $ | — | $ | — | $ | — | $ | — | $ | 183,577 | $ | 183,577 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
| National Lending | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Term lending | 11,900 | 3,851 | 6,390 | 22,141 | 783,182 | 805,323 | 266 | 16,274 | 16,540 | ||||||||||||||||||||||||||||||||||||||||||||
| Asset based lending | 17 | — | — | 17 | 182,402 | 182,419 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Factoring | — | — | — | — | 281,173 | 281,173 | — | 1,096 | 1,096 | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 194 | 9,746 | 6,882 | 16,822 | 264,262 | 281,084 | 4,344 | 3,583 | 7,927 | ||||||||||||||||||||||||||||||||||||||||||||
| Insurance premium finance | 1,227 | 748 | 2,364 | 4,339 | 333,601 | 337,940 | 2,364 | — | 2,364 | ||||||||||||||||||||||||||||||||||||||||||||
| SBA/USDA | — | — | 1,027 | 1,027 | 317,360 | 318,387 | 427 | 600 | 1,027 | ||||||||||||||||||||||||||||||||||||||||||||
| Other commercial finance | — | — | — | — | 101,658 | 101,658 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial finance | 13,338 | 14,345 | 16,663 | 44,346 | 2,263,638 | 2,307,984 | 7,401 | 21,553 | 28,954 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer credit products | 377 | 358 | 499 | 1,233 | 88,576 | 89,809 | 499 | — | 499 | ||||||||||||||||||||||||||||||||||||||||||||
| Other consumer finance | 600 | 536 | 373 | 1,509 | 132,833 | 134,342 | 373 | — | 373 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer finance | 977 | 894 | 872 | 2,743 | 221,408 | 224,151 | 872 | — | 872 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax services | — | — | 1,743 | 1,743 | 1,323 | 3,066 | 1,743 | — | 1,743 | ||||||||||||||||||||||||||||||||||||||||||||
| Warehouse finance | — | — | — | — | 293,375 | 293,375 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total National Lending | 14,315 | 15,239 | 19,278 | 48,832 | 2,779,744 | 2,828,576 | 10,016 | 21,553 | 31,569 | ||||||||||||||||||||||||||||||||||||||||||||
| Community Banking | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate and operating | — | — | 630 | 630 | 456,741 | 457,371 | 50 | 580 | 630 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer one-to-four family real estate and other | 905 | 114 | 50 | 1,069 | 15,417 | 16,486 | — | 50 | 50 | ||||||||||||||||||||||||||||||||||||||||||||
| Agricultural real estate and operating | — | — | 1,769 | 1,769 | 9,938 | 11,707 | — | 1,769 | 1,769 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Community Banking | 905 | 114 | 2,449 | 3,468 | 482,096 | 485,564 | 50 | 2,399 | 2,449 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases held for investment | 15,220 | 15,353 | 21,727 | 52,300 | 3,261,840 | 3,314,140 | 10,066 | 23,952 | 34,018 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 15,220 | $ | 15,353 | $ | 21,727 | $ | 52,300 | $ | 3,445,417 | $ | 3,497,717 | $ | 10,066 | $ | 23,952 | $ | 34,018 | |||||||||||||||||||||||||||||||||||
28
Nonaccrual loans and leases by year of origination were as follows:
| Amortized Cost Basis | ||||||||||||||||||||||||||
| (Dollars in Thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total | |||||||||||||||||||||||
| December 31, 2020 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | ||||||||||||||||||||
| National Lending | ||||||||||||||||||||||||||
| Term lending | $ | 42 | $ | 4,051 | $ | 2,117 | $ | 3,051 | $ | 11 | $ | 4,469 | $ | — | $ | 13,741 | ||||||||||
| Asset based lending | — | — | — | — | — | — | 917 | 917 | ||||||||||||||||||
| Factoring | — | — | — | — | — | — | 842 | 842 | ||||||||||||||||||
| Lease financing | — | 90 | 2,106 | 411 | — | — | — | 2,607 | ||||||||||||||||||
| SBA/USDA | — | — | — | — | — | 600 | — | 600 | ||||||||||||||||||
| Commercial finance | 42 | 4,141 | 4,223 | 3,462 | 11 | 5,069 | 1,759 | 18,707 | ||||||||||||||||||
| Total National Lending | 42 | 4,141 | 4,223 | 3,462 | 11 | 5,069 | 1,759 | 18,707 | ||||||||||||||||||
| Community Banking | — | |||||||||||||||||||||||||
| Commercial real estate and operating | — | 1,260 | — | 300 | 13,618 | 3,278 | — | 18,456 | ||||||||||||||||||
| Consumer one-to-four family real estate and other | — | — | 41 | 9 | — | 114 | — | 163 | ||||||||||||||||||
| Agricultural real estate and operating | — | — | — | 1,419 | — | — | 350 | 1,769 | ||||||||||||||||||
| Total Community Banking | — | 1,260 | 41 | 1,727 | 13,618 | 3,392 | 350 | 20,388 | ||||||||||||||||||
| Total nonaccrual loans and leases | $ | 42 | $ | 5,401 | $ | 4,264 | $ | 5,189 | $ | 13,629 | $ | 8,461 | $ | 2,109 | $ | 39,096 | ||||||||||
Loans and leases that are 90 days or more delinquent and accruing by year of origination were as follows:
| Amortized Cost Basis | ||||||||||||||||||||||||||
| (Dollars in Thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total | |||||||||||||||||||||||
| December 31, 2020 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | ||||||||||||||||||||
| National Lending | ||||||||||||||||||||||||||
| Term lending | $ | — | $ | — | $ | 131 | $ | 232 | $ | — | $ | 22 | $ | — | $ | 385 | ||||||||||
| Lease financing | — | 543 | 311 | 184 | 3 | 1 | — | 1,042 | ||||||||||||||||||
| Insurance premium finance | — | 641 | 24 | — | — | — | — | 665 | ||||||||||||||||||
| Commercial finance | — | 1,184 | 466 | 416 | 3 | 23 | — | 2,092 | ||||||||||||||||||
| Other consumer finance | — | — | — | — | — | 675 | — | 675 | ||||||||||||||||||
Consumer finance (1) | — | — | — | — | — | 675 | — | 675 | ||||||||||||||||||
| Total National Lending | — | 1,184 | 466 | 416 | 3 | 698 | — | 2,767 | ||||||||||||||||||
| Total 90 days or more delinquent and accruing | $ | — | $ | 1,184 | $ | 466 | $ | 416 | $ | 3 | $ | 698 | $ | — | $ | 2,767 | ||||||||||
(1) Consumer credit products are not included in the table as they are evaluated under a separate methodology for allowance for credit loss purposes that considers the overall Program structure. Refer to the Company’s most recent audited financial statements for additional information on these Programs.
Certain loans and leases 90 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.
29
The following table provides the average recorded investment in non-accrual loans and leases:
| Three Months Ended December 31, 2020 | |||||
| (Dollars in Thousands) | Average Recorded Investment | ||||
| National Lending | |||||
| Term lending | $ | 14,876 | |||
| Asset based lending | 1,074 | ||||
| Factoring | 935 | ||||
| Lease financing | 3,556 | ||||
| SBA/USDA | 600 | ||||
| Commercial finance | 21,041 | ||||
| Total National Lending | 21,041 | ||||
| Community Banking | |||||
| Commercial real estate and operating | 6,539 | ||||
| Consumer one-to-four family real estate and other | 125 | ||||
| Agricultural real estate and operating | 1,769 | ||||
| Total Community Banking | 8,433 | ||||
| Total loans and leases | $ | 29,474 | |||
The recognized interest income on the Company's nonaccrual loans and leases during the quarter ended December 31, 2020 was not significant.
The following table provides the average recorded investment in impaired loans and leases:
| Three Months Ended December 31, 2019 | ||||||||||||||
| (Dollars in Thousands) | Average Recorded Investment | Recognized Interest Income | ||||||||||||
| National Lending | ||||||||||||||
| Term lending | $ | 19,537 | $ | 74 | ||||||||||
| Asset based lending | 427 | — | ||||||||||||
| Factoring | 3,849 | — | ||||||||||||
| Lease financing | 3,686 | — | ||||||||||||
| SBA/USDA | 3,788 | — | ||||||||||||
| Commercial finance | 31,287 | 74 | ||||||||||||
| Other consumer finance | 1,551 | 35 | ||||||||||||
| Consumer finance | 1,551 | 35 | ||||||||||||
| Total National Lending | 32,838 | 109 | ||||||||||||
| Community Banking | ||||||||||||||
| Commercial real estate and operating | 446 | 13 | ||||||||||||
| Consumer one-to-four family real estate and other | 90 | 8 | ||||||||||||
| Agricultural real estate and operating | 2,921 | 42 | ||||||||||||
| Total Community Banking | 3,457 | 63 | ||||||||||||
| Total loans and leases | $ | 36,295 | $ | 172 | ||||||||||
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 $0.1 million of national lending loans that were modified in a TDR during the three months ended December 31, 2020, all of which were modified to extend the term of the loan, and no community banking loans. There were $0.6 million community banking loans and $0.4 million of national lending loans and leases that were modified in a TDR during the three months ended December 31, 2019.
30
During the three months ended December 31, 2020, the Company had $0.4 million of national lending loans and no community banking loans that were modified in a TDR within the previous 12 months and for which there was a payment default. During the three months ended December 31, 2019, the Company had $1.2 million of community banking loans and $0.3 million national lending loans that were modified in a TDR within the previous 12 months and for which there was a payment default. TDR net charge-offs and the impact of TDRs on the Company's allowance for loan and lease losses were insignificant during the quarters ended December 31, 2020 and December 31, 2019.
NOTE 7. EARNINGS PER COMMON SHARE ("EPS")
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 under the two-class method. Basic earnings per common share is computed using the two-class method 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 is calculated using the more dilutive of the treasury stock method or the two-class method. 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, performance share units, and nonvested restricted stock, where applicable. Diluted EPS under the two-class method also considers the allocation of earnings to the participating securities. Antidilutive securities are disregarded in earnings per share calculations. Diluted EPS shown below reflects the two-class method, as diluted EPS under the two-class method was more dilutive than under the treasury stock method.
A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share is presented below.
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands, Except Share and Per Share Data) | 2020 | 2019 | |||||||||
| Basic income per common share: | |||||||||||
| Net income attributable to Meta Financial Group, Inc. | $ | 28,037 | $ | 21,068 | |||||||
| Dividends and undistributed earnings allocated to participating securities | (554) | (460) | |||||||||
| Basic net earnings available to common stockholders | 27,483 | 20,608 | |||||||||
| Undistributed earnings allocated to nonvested restricted stockholders | 521 | 420 | |||||||||
| Reallocation of undistributed earnings to nonvested restricted stockholders | (521) | (420) | |||||||||
| Diluted net earnings available to common stockholders | $ | 27,483 | $ | 20,608 | |||||||
| Total weighted-average basic common shares outstanding | 32,782,285 | 36,613,699 | |||||||||
Effect of dilutive securities(1) | |||||||||||
| Stock options | — | 34,090 | |||||||||
| Performance share units | 8,610 | — | |||||||||
| Total effect of dilutive securities | 8,610 | 34,090 | |||||||||
| Total weighted-average diluted common shares outstanding | 32,790,895 | 36,647,789 | |||||||||
| Net earnings per common share: | |||||||||||
| Basic earnings per common share | $ | 0.84 | $ | 0.56 | |||||||
Diluted earnings per common share(2) | $ | 0.84 | $ | 0.56 | |||||||
(1) Represents the effect of the assumed exercise of stock options and vesting of performance share units and restricted stock, as applicable, utilizing the treasury stock method.
(2) Excluded from the computation of diluted earnings per share for the three months ended December 31, 2020 and 2019, respectively, were 660,659 and 818,089 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive.
31
NOTE 8. RENTAL EQUIPMENT, NET
Rental equipment consists of the following:
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | |||||||||
| Computers and IT networking equipment | $ | 16,026 | $ | 15,926 | |||||||
| Motor vehicles and other | 47,800 | 52,913 | |||||||||
| Office furniture and equipment | 78,850 | 74,197 | |||||||||
| Solar panels and equipment | 122,071 | 118,808 | |||||||||
| Total | 264,747 | 261,844 | |||||||||
| Accumulated depreciation | (59,673) | (57,601) | |||||||||
| Unamortized initial direct costs | 1,658 | 1,721 | |||||||||
| Net book value | $ | 206,732 | $ | 205,964 | |||||||
Undiscounted future minimum lease payments expected to be received for operating leases were as follows:
| (Dollars in Thousands) | |||||
| Remaining in 2021 | $ | 23,422 | |||
| 2022 | 27,390 | ||||
| 2023 | 23,644 | ||||
| 2024 | 17,173 | ||||
| 2025 | 12,313 | ||||
| Thereafter | 18,295 | ||||
| Total undiscounted future minimum lease payments receivable for operating leases | $ | 122,237 | |||
NOTE 9. FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS
The following table provides an analysis of changes in foreclosed real estate and repossessed assets:
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Balance, beginning of period | $ | 9,957 | $ | 29,494 | |||||||
| Additions | 9 | 41 | |||||||||
| Reductions: | |||||||||||
| Write-downs | 123 | 83 | |||||||||
| Net proceeds from sale | 2,657 | 23,085 | |||||||||
| (Gain) loss on sale | — | 5,039 | |||||||||
| Total reductions | 2,780 | 28,207 | |||||||||
| Balance, ending of period | $ | 7,186 | $ | 1,328 | |||||||
At December 31, 2020 and September 30, 2020, the Company had established a valuation allowance of $0.6 million and $0.5 million for repossessed assets, respectively. As of December 31, 2020 and September 30, 2020, the Company had no loans or leases in the process of foreclosure.
During the fiscal year ended September 30, 2020, the Company sold $28.1 million of other real estate owned ("OREO"), which consisted of assets related to a Community Bank agriculture real estate customer. The sale consisted of 30-plus parcels of land and the Company recognized a $5.0 million loss that was included in the "Gain (loss) on sale of other" line on the Condensed Consolidated Statements of Operations. The Company also recognized $1.1 million in deferred rental income and $0.2 million in OREO expenses related to these foreclosed properties.
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NOTE 10. GOODWILL AND INTANGIBLE ASSETS
The Company held a total of $309.5 million of goodwill at December 31, 2020. The recorded goodwill is a result of multiple business combinations that have been consummated since fiscal year 2015, with 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 least annually or more often if conditions indicate a possible impairment. The assessment is done at a reporting unit level, which is one level below the operating segments. There have been no changes to the carrying amount of goodwill during the three months ended December 31, 2020.
The changes in the carrying amount of the Company’s intangible assets for the three months ended December 31, 2020 and 2019 were as follows:
| (Dollars in Thousands) | Trademark(1) | Non-Compete(2) | Customer Relationships(3) | All Others(4) | Total | ||||||||||||||||||||||||
| Intangible Assets | |||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 10,901 | $ | 422 | $ | 24,333 | $ | 6,036 | $ | 41,692 | |||||||||||||||||||
| Acquisitions during the period | — | — | — | 5 | 5 | ||||||||||||||||||||||||
| Amortization during the period | (272) | (95) | (1,486) | (160) | (2,013) | ||||||||||||||||||||||||
| Write-offs during the period | — | — | — | (24) | (24) | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 10,629 | $ | 327 | $ | 22,847 | $ | 5,857 | $ | 39,660 | |||||||||||||||||||
| Gross carrying amount | $ | 14,624 | $ | 2,481 | $ | 82,088 | $ | 10,123 | $ | 109,316 | |||||||||||||||||||
| Accumulated amortization | (3,995) | (2,154) | (48,993) | (4,047) | (59,189) | ||||||||||||||||||||||||
| Accumulated impairment | — | — | (10,248) | (219) | (10,467) | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 10,629 | $ | 327 | $ | 22,847 | $ | 5,857 | $ | 39,660 | |||||||||||||||||||
(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.
| (Dollars in Thousands) | Trademark(1) | Non-Compete(2) | Customer Relationships(3) | All Others(4) | Total | ||||||||||||||||||||||||
| Intangible Assets | |||||||||||||||||||||||||||||
| Balance as of September 30, 2019 | $ | 11,959 | $ | 827 | $ | 33,207 | $ | 6,817 | $ | 52,810 | |||||||||||||||||||
| Acquisitions during the period | — | — | — | 17 | 17 | ||||||||||||||||||||||||
| Amortization during the period | (264) | (113) | (2,115) | (184) | (2,676) | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 11,695 | $ | 714 | $ | 31,092 | $ | 6,650 | $ | 50,151 | |||||||||||||||||||
| Gross carrying amount | $ | 14,624 | $ | 2,480 | $ | 82,088 | $ | 10,719 | $ | 109,911 | |||||||||||||||||||
| Accumulated amortization | (2,929) | (1,766) | (40,748) | (3,410) | (48,853) | ||||||||||||||||||||||||
| Accumulated impairment | — | — | (10,248) | (659) | (10,907) | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 11,695 | $ | 714 | $ | 31,092 | $ | 6,650 | $ | 50,151 | |||||||||||||||||||
(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.
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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 nine months of fiscal 2021 and subsequent fiscal years was as follows:
| (Dollars in Thousands) | December 31, 2020 | ||||
| Remaining in 2021 | $ | 6,532 | |||
| 2022 | 6,420 | ||||
| 2023 | 5,102 | ||||
| 2024 | 4,384 | ||||
| 2025 | 3,826 | ||||
| 2026 | 3,252 | ||||
| Thereafter | 10,144 | ||||
| Total anticipated intangible amortization | $ | 39,660 | |||
The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment. There were no impairments to intangible assets during the three months ended December 31, 2020 and 2019.
NOTE 11. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES
Operating lease ROU assets, included in other assets, were $25.2 million at December 31, 2020.
Operating lease liabilities, included in accrued expenses and other liabilities, were $26.7 million at December 31, 2020.
Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities were as follows:
| (Dollars in Thousands) | December 31, 2020 | ||||
| Remaining in 2021 | $ | 2,880 | |||
| 2022 | 3,580 | ||||
| 2023 | 2,899 | ||||
| 2024 | 2,908 | ||||
| 2025 | 2,755 | ||||
| Thereafter | 15,765 | ||||
| Total undiscounted future minimum lease payments | 30,787 | ||||
| Discount | (4,082) | ||||
| Total operating lease liabilities | $ | 26,705 | |||
The weighted-average discount rate and remaining lease term for operating leases were as follows:
| December 31, 2020 | |||||
| Weighted-average discount rate | 2.34 | % | |||
| Weighted-average remaining lease term (years) | 11.23 | ||||
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The components of total lease costs for operating leases were as follows:
| (Dollars in Thousands) | Three Months Ended December 31, 2020 | ||||
| Lease expense | $ | 954 | |||
| Short-term and variable lease cost | 63 | ||||
| ROU asset impairment | 224 | ||||
| Sublease income | (108) | ||||
| Total lease cost for operating leases | $ | 1,133 | |||
NOTE 12. STOCKHOLDERS' EQUITY
Repurchase of Common Stock
The Company's Board of Directors authorized the November 20, 2019 share repurchase program to repurchase up to 7,500,000 shares of the Company's outstanding common stock. This authorization is effective from November 21, 2019 through December 31, 2022. During the three months ended December 31, 2020, and 2019, the Company repurchased 1,943,575 and 899,371 shares, respectively, as part of the share repurchase program.
Under the repurchase program, repurchased shares were retired and designated as authorized but unissued shares. The Company accounts for repurchased shares 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. As of December 31, 2020, the remaining number of shares available for repurchase under this program was 2,285,157 shares of common stock.
For the three months ended December 31, 2020, and 2019, the Company also repurchased 79,101 and 82,971 shares, or $1.8 million and $2.7 million of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
NOTE 13. STOCK COMPENSATION
The Company maintains the Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended and restated (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of stock options, nonvested (restricted) shares, and performance share units ("PSUs") 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 nonvested (restricted) shares and performance share units granted under the Company’s incentive plan is equal to the fair market value of the underlying stock at the grant date, adjusted for dividends where applicable. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.
The following tables show the activity of nonvested (restricted) shares and PSUs granted, exercised, or forfeited under the 2002 Omnibus Incentive Plan for the three months ended December 31, 2020. There were no options granted, exercised or forfeited under this plan during the three months ended December 31, 2020.
| (Dollars in Thousands, Except Per Share Data) | Number of Shares | Weighted Average Fair Value at Grant | |||||||||
Nonvested shares outstanding, September 30, 2020 | 790,083 | $ | 30.03 | ||||||||
| Granted | 136,087 | 26.22 | |||||||||
| Vested | (237,413) | 28.86 | |||||||||
| Forfeited or expired | (91,060) | 29.74 | |||||||||
Nonvested shares outstanding, December 31, 2020 | 597,697 | $ | 29.67 | ||||||||
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| (Dollars in Thousands, Except Per Share Data) | Number of Units | Weighted Average Fair Value at Grant | |||||||||
Performance share units outstanding, September 30, 2020 | — | $ | — | ||||||||
Granted(1) | 60,984 | 34.03 | |||||||||
| Vested | — | — | |||||||||
| Forfeited or expired | — | — | |||||||||
Performance share units outstanding, December 31, 2020 | 60,984 | $ | 34.03 | ||||||||
(1) The number of PSUs granted reflects the target number of PSUs able to be earned under a given award.
At December 31, 2020, stock-based compensation expense not yet recognized in income totaled $9.4 million, which is expected to be recognized over a weighted average remaining period of 2.26 years.
NOTE 14. INCOME TAXES
The Company recorded an income tax expense of $3.5 million for the three months ended December 31, 2020, resulting in an effective tax rate of 10.77%, compared to an income tax benefit of $0.7 million, or an effective tax rate of 2.97%, for the three months ended December 31, 2019. The Company’s effective tax rate was 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.
The table below compares the income tax expense components for the periods presented.
| Three Months Ended December 31, | |||||||||||
| (Dollars in Thousands) | 2020 | 2019 | |||||||||
| Provision at statutory rate | $ | 6,630 | $ | 4,567 | |||||||
| Tax-exempt income | (249) | (294) | |||||||||
| State income taxes | 1,488 | 1,090 | |||||||||
| Interim period effective rate adjustment | 5,467 | 860 | |||||||||
| Tax credit investments, net - federal | (10,123) | (4,800) | |||||||||
| Research tax credit | (323) | (1,709) | |||||||||
| IRC 162(m) nondeductible compensation | 334 | 838 | |||||||||
| Other, net | 309 | 128 | |||||||||
| Income tax expense (benefit) | $ | 3,533 | $ | 680 | |||||||
| Effective tax rate | 10.77 | % | 2.97 | % | |||||||
The Company does not expect significant income tax impacts due to the CARES Act or the CAA, which were signed in response to the COVID-19 pandemic.
NOTE 15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes various commitments to extend credit that are not reflected in the accompanying Condensed Consolidated Financial Statements as described below.
At December 31, 2020 and September 30, 2020, unfunded loan commitments approximated $1.35 billion and $1.22 billion, 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 no commitments to purchase securities at December 31, 2020 or September 30, 2020. The Company had no commitments to sell securities at December 31, 2020 or September 30, 2020.
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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.
Since certain commitments to make loans and to fund lines of credit 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.
Legal Proceedings
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 positive balances to which Card Limited is 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 Court ruled in favor of MetaBank on cross motions for summary judgment and vacated the trial. Card Limited has appealed this decision. The Bank intends to continue to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation.
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.
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.
NOTE 16. REVENUE FROM CONTRACTS WITH CUSTOMERS
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 17. Segment Reporting to the Condensed Consolidated Financial Statements.
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| (Dollars in Thousands) | Consumer | Commercial | Corporate Services/Other | Consolidated Company | |||||||||||||||||||||||||||||||
| Three Months Ended December 31, | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||
Net interest income(1) | $ | 22,347 | $ | 16,557 | $ | 41,848 | $ | 39,736 | $ | 1,804 | $ | 8,358 | $ | 65,999 | $ | 64,651 | |||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||||||||||||||
| Refund transfer product fees | 647 | 192 | — | — | — | — | 647 | 192 | |||||||||||||||||||||||||||
Tax advance product fees(1) | 1,960 | 2,276 | — | — | — | — | 1,960 | 2,276 | |||||||||||||||||||||||||||
| Payment card and deposit fees | 22,564 | 21,499 | — | — | — | — | 22,564 | 21,499 | |||||||||||||||||||||||||||
| Other bank and deposit fees | — | — | 234 | 278 | 3 | 209 | 237 | 487 | |||||||||||||||||||||||||||
Rental income(1) | 5 | 4 | 9,880 | 11,034 | — | 1,313 | 9,885 | 12,351 | |||||||||||||||||||||||||||
Gain (loss) on sale of other(1) | — | 240 | 2,591 | 2,339 | 256 | (5,147) | 2,847 | (2,568) | |||||||||||||||||||||||||||
Other income(1) | 159 | 553 | 2,461 | 1,329 | 4,695 | 1,364 | 7,315 | 3,246 | |||||||||||||||||||||||||||
| Total noninterest income (expense) | 25,335 | 24,764 | 15,166 | 14,980 | 4,954 | (2,261) | 45,455 | 37,483 | |||||||||||||||||||||||||||
| Revenue | $ | 47,682 | $ | 41,321 | $ | 57,014 | $ | 54,716 | $ | 6,758 | $ | 6,097 | $ | 111,454 | $ | 102,134 | |||||||||||||||||||
(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. At December 31, 2020 and September 30, 2020, there were no receivables related to refund transfer fees, which reflect earned revenue with unconditional rights to payment for product fee income. All refund transfer fees are recorded within the Consumer reporting segment.
Card Fees. Card fees relate to MPS, Community 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 both the Consumer and Commercial reporting segments, the substantial majority of which is derived from the Company's payments divisions and reported in payments card and deposit fees. Card fees related to the Community Bank are reported within other bank and deposit fees.
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Bank and Deposit Fees. Fees are earned on depository accounts for consumer and commercial 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. Bank and deposit fees are recorded within both the Consumer and Commercial reporting segments, the majority of which are derived from the Company's payments divisions. Bank and deposit fees related to the Community Bank are reported within other bank and deposit fees.
Principal vs Agent. The Consumer reporting segment includes principal/agent relationships. Within this segment, MPS relationships are recorded on a gross basis within the Condensed Consolidated Statements of Operations, as Meta is the principal in the contract, with the exception of association/network contracts and partner/processor contracts for prepaid cards, which are recorded on a net basis within the Condensed Consolidated Statements of Operations as Meta is the agent in these contracts. Also within this segment, Tax Service relationships are recorded on a gross basis within the Condensed Consolidated Statements of Operations, 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 Condensed Consolidated Statements of Operations as Meta is the agent in these contracts.
NOTE 17. 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: Consumer, Commercial, and Corporate Services/Other. The Meta Payment Systems and Tax Services divisions, as well as the Consumer Credit Products and ClearBalance business lines, are reported in the Consumer segment. The Crestmark and AFS divisions are reported in the Commercial segment. The Community Bank division, Warehouse Finance, and Student Loan lending portfolio are included in the Corporate Services/Other segment. The Corporate Services/Other segment also includes certain shared services as well as treasury related functions such as the investment portfolio, wholesale deposits and borrowings. The Company does not report indirect general and administrative expenses in the Consumer and Commercial segments. Beginning October 1, 2020, Warehouse Finance, formerly reported in the Consumer segment, is now included in the Corporate Services/Other segment. Prior periods have been reclassified to conform to the current presentation.
The Company adopted ASU 2018-02 as of October 1, 2020. The amendments in this ASU allow for a reclassification from AOCI to Retained Earnings for stranded tax effects from the Tax Cuts and Jobs Act ("TCJA"). For the Company, these amendments are limited to any unrealized gains and losses held in Other Comprehensive Income for debt securities AFS held at the time of the TCJA enactment. The Company determined there were no stranded tax effects from the TCJA enactment and has not made any reclassification from AOCI to Retained Earnings upon adoption of this ASU.
The following tables present segment data for the Company:
| Three Months Ended December 31, 2020 | |||||||||||||||||||||||
| (Dollars in Thousands) | Consumer | Commercial | Corporate Services/Other | Total | |||||||||||||||||||
| Net interest income | $ | 22,347 | $ | 41,848 | $ | 1,804 | $ | 65,999 | |||||||||||||||
| Provision for credit losses | 2,366 | 6,467 | (2,744) | 6,089 | |||||||||||||||||||
| Noninterest income | 25,335 | 15,166 | 4,954 | 45,455 | |||||||||||||||||||
| Noninterest expense | 18,162 | 27,168 | 27,245 | 72,575 | |||||||||||||||||||
| Income (loss) before income tax expense (benefit) | 27,154 | 23,379 | (17,743) | 32,790 | |||||||||||||||||||
| Total assets | 430,067 | 2,917,142 | 3,917,306 | 7,264,515 | |||||||||||||||||||
| Total goodwill | 87,145 | 222,360 | — | 309,505 | |||||||||||||||||||
| Total deposits | 5,884,638 | 13,230 | 309,923 | 6,207,791 | |||||||||||||||||||
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| Three Months Ended December 31, 2019 | |||||||||||||||||||||||
| (Dollars in Thousands) | Consumer | Commercial | Corporate Services/Other | Total | |||||||||||||||||||
| Net interest income | $ | 16,557 | $ | 39,736 | $ | 8,358 | $ | 64,651 | |||||||||||||||
| Provision for loan and lease losses | 974 | 3,701 | (1,268) | 3,407 | |||||||||||||||||||
| Noninterest income | 24,764 | 14,980 | (2,261) | 37,483 | |||||||||||||||||||
| Noninterest expense | 16,741 | 26,726 | 32,331 | 75,798 | |||||||||||||||||||
| Income (loss) before income tax expense (benefit) | 23,606 | 24,289 | (24,966) | 22,929 | |||||||||||||||||||
| Total assets | 447,963 | 2,494,253 | 3,238,710 | 6,180,926 | |||||||||||||||||||
| Total goodwill | 87,145 | 222,360 | — | 309,505 | |||||||||||||||||||
| Total deposits | 2,999,184 | 13,855 | 1,793,541 | 4,806,580 | |||||||||||||||||||
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS
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 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 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.
Debt Securities Available for Sale and Held to Maturity. Debt securities available for sale are recorded at fair value on a recurring basis and debt securities held to maturity are carried at amortized cost.
The fair value of debt securities available for sale, categorized primarily as Level 2, is recorded using prices obtained from independent asset pricing services that are based on observable transactions, but not quoted markets. Management reviews the prices obtained from independent asset pricing servicing for unusual fluctuations and comparison to current market trading activity.
Equity Securities. Marketable equity securities and certain non-marketable equity securities are recorded at fair value on a recurring basis. The fair values of marketable equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
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The following tables summarize the fair values of debt securities available for sale and equity securities as they are measured at fair value on a recurring basis:
| Fair Value At December 31, 2020 | |||||||||||||||||||||||
| (Dollars in Thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||
| SBA securities | $ | 162,009 | $ | — | $ | 162,009 | $ | — | |||||||||||||||
| Obligations of states and political subdivisions | 2,840 | — | 2,840 | — | |||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 309,638 | — | 309,638 | — | |||||||||||||||||||
| Asset-backed securities | 322,876 | — | 322,876 | — | |||||||||||||||||||
| Mortgage-backed securities | 430,761 | — | 430,761 | — | |||||||||||||||||||
| Total debt securities AFS | $ | 1,228,124 | $ | — | $ | 1,228,124 | $ | — | |||||||||||||||
Common equities and mutual funds(1) | $ | 3,148 | $ | 3,148 | $ | — | $ | — | |||||||||||||||
Non-marketable equity securities(2) | $ | 3,896 | $ | — | $ | — | $ | — | |||||||||||||||
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at December 31, 2020 and September 30, 2020.
(2) Consists of certain non-marketable equity securities that are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
| Fair Value At September 30, 2020 | |||||||||||||||||||||||
| (Dollars in Thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Debt securities AFS | |||||||||||||||||||||||
| SBA securities | $ | 164,955 | $ | — | $ | 164,955 | $ | — | |||||||||||||||
| Obligations of states and political subdivisions | 841 | — | 841 | — | |||||||||||||||||||
| Non-bank qualified obligations of states and political subdivisions | 323,774 | — | 323,774 | — | |||||||||||||||||||
| Asset-backed securities | 324,925 | — | 324,925 | — | |||||||||||||||||||
| Mortgage-backed securities | 453,607 | — | 453,607 | — | |||||||||||||||||||
| Total debt securities AFS | $ | 1,268,102 | $ | — | $ | 1,268,102 | $ | — | |||||||||||||||
Common equities and mutual funds(1) | $ | 2,969 | $ | 2,969 | $ | — | $ | — | |||||||||||||||
Non-marketable equity securities(2) | $ | 2,784 | $ | — | $ | — | $ | — | |||||||||||||||
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at December 31, 2020 and September 30, 2020.
(2) Consists of certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
Foreclosed Real Estate and Repossessed Assets. Real estate properties and repossessed assets are initially recorded at the fair value less selling costs at the date of foreclosure, establishing a new cost basis. The carrying amount represents the lower of the new cost basis or the fair value less selling costs of foreclosed assets that were measured at fair value subsequent to their initial classification as foreclosed assets.
Loans and Leases. The Company does not record loans and leases at fair value on a recurring basis. However, if a loan or lease is individually evaluated for risk of credit loss and repayment is expected to be solely provided by the values of the underlying collateral, the Company measures fair value on a nonrecurring basis. Fair value is determined by the fair value of the underlying collateral less estimated costs to sell. The fair value of the collateral is determined based on internal estimates and/or assessments provided by third-party appraisers and the valuation relies on discount rates ranging from 4% to 90%.
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The following table summarizes the assets of the Company that are measured at fair value in the Condensed Consolidated Statements of Financial Condition on a non-recurring basis:
| Fair Value At December 31, 2020 | |||||||||||||||||||||||
| (Dollars in Thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Impaired loans and leases, net | |||||||||||||||||||||||
| Commercial finance | $ | 4,080 | $ | — | $ | — | $ | 4,080 | |||||||||||||||
| Total National Lending | 4,080 | — | — | 4,080 | |||||||||||||||||||
| Commercial real estate and operating | 9,029 | — | — | 9,029 | |||||||||||||||||||
| Total Community Banking | 9,029 | — | — | 9,029 | |||||||||||||||||||
| Total impaired loans and leases, net | 13,109 | — | — | 13,109 | |||||||||||||||||||
| Foreclosed assets, net | 7,186 | — | — | 7,186 | |||||||||||||||||||
| Total | $ | 20,295 | $ | — | $ | — | $ | 20,295 | |||||||||||||||
| Fair Value At September 30, 2020 | |||||||||||||||||||||||
| (Dollars in Thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Impaired loans and leases, net | |||||||||||||||||||||||
| Commercial finance | $ | 9,240 | $ | — | $ | — | $ | 9,240 | |||||||||||||||
| Total National Lending | 9,240 | — | — | 9,240 | |||||||||||||||||||
| Commercial real estate and operating | 20 | — | — | 20 | |||||||||||||||||||
| Total Community Banking | 20 | — | — | 20 | |||||||||||||||||||
| Total impaired loans and leases, net | 9,260 | — | — | 9,260 | |||||||||||||||||||
| Foreclosed assets, net | 9,957 | — | — | 9,957 | |||||||||||||||||||
| Total | $ | 19,217 | $ | — | $ | — | $ | 19,217 | |||||||||||||||
| Quantitative Information About Level 3 Fair Value Measurements | |||||||||||||||||||||||||||||
| (Dollars in Thousands) | Fair Value at December 31, 2020 | Fair Value at September 30, 2020 | Valuation Technique | Unobservable Input | Range of Inputs | ||||||||||||||||||||||||
| Impaired loans and leases, net | $ | 13,109 | 9,260 | Market approach | Appraised values(1) | 4% - 90% | |||||||||||||||||||||||
| Foreclosed assets, net | $ | 7,186 | 9,957 | Market approach | Appraised values(1) | 4% - 30% | |||||||||||||||||||||||
(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 90%.
Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Condensed Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair value estimates were made at December 31, 2020 and September 30, 2020 based on relevant market information and information about financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or a liability could be settled. However, since there is no active market for certain financial instruments of the Company, the estimates of fair value are subjective in nature, involve uncertainties, and include matters of significant judgment. Changes in assumptions as well as tax considerations could significantly affect the estimated values. Accordingly, 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.
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The following tables present the carrying amount and estimated fair value of the financial instruments held by the Company:
| December 31, 2020 | |||||||||||||||||||||||||||||
| (Dollars in Thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,586,451 | $ | 1,586,451 | $ | 1,586,451 | $ | — | $ | — | |||||||||||||||||||
| Debt securities available for sale | 1,228,124 | 1,228,124 | — | 1,228,124 | — | ||||||||||||||||||||||||
| Debt securities held to maturity | 81,328 | 82,927 | — | 82,927 | — | ||||||||||||||||||||||||
Common equities and mutual funds(1) | 3,148 | 3,148 | 3,148 | — | — | ||||||||||||||||||||||||
Non-marketable equity securities(1)(2) | 17,646 | 17,646 | — | 13,750 | — | ||||||||||||||||||||||||
| Loans held for sale | 133,659 | 133,659 | — | 133,659 | — | ||||||||||||||||||||||||
| Loans and leases receivable | 3,439,564 | 3,426,720 | — | — | 3,426,720 | ||||||||||||||||||||||||
| Federal Reserve Bank and Federal Home Loan Bank stocks | 27,138 | 27,138 | — | 27,138 | — | ||||||||||||||||||||||||
| Accrued interest receivable | 17,133 | 17,133 | 17,133 | — | — | ||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Deposits | 6,207,791 | 6,208,167 | 6,040,903 | 167,265 | — | ||||||||||||||||||||||||
| Other short- and long-term borrowings | 96,760 | 98,873 | — | 98,873 | — | ||||||||||||||||||||||||
| Accrued interest payable | 2,068 | 2,068 | 2,068 | — | — | ||||||||||||||||||||||||
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at December 31, 2020 and September 30, 2020.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
| September 30, 2020 | |||||||||||||||||||||||||||||
| (Dollars in Thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 427,367 | $ | 427,367 | $ | 427,367 | $ | — | $ | — | |||||||||||||||||||
| Debt securities available for sale | 1,268,102 | 1,268,102 | — | 1,268,102 | — | ||||||||||||||||||||||||
| Debt securities held to maturity | 92,610 | 93,745 | — | 93,745 | — | ||||||||||||||||||||||||
Common equities and mutual funds(1) | 2,969 | 2,969 | 2,969 | — | — | ||||||||||||||||||||||||
Non-marketable equity securities(1)(2) | 14,784 | 14,784 | — | 12,000 | — | ||||||||||||||||||||||||
| Loans held for sale | 183,577 | 183,577 | — | 183,577 | — | ||||||||||||||||||||||||
| Loans and leases receivable | 3,314,140 | 3,307,037 | — | — | 3,307,037 | ||||||||||||||||||||||||
| Federal Reserve Bank and Federal Home Loan Bank stocks | 27,138 | 27,138 | — | 27,138 | — | ||||||||||||||||||||||||
| Accrued interest receivable | 16,628 | 16,628 | 16,628 | — | — | ||||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||||||||
| Deposits | 4,979,200 | 4,980,073 | 4,705,028 | 275,045 | — | ||||||||||||||||||||||||
| Overnight federal funds purchased | — | — | — | — | — | ||||||||||||||||||||||||
| Federal Home Loan Bank advances | — | — | — | — | — | ||||||||||||||||||||||||
| Other short- and long-term borrowings | 98,224 | 100,185 | — | 100,185 | — | ||||||||||||||||||||||||
| Accrued interest payable | 1,923 | 1,923 | 1,923 | — | — | ||||||||||||||||||||||||
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at December 31, 2020 and September 30, 2020.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
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NOTE 19. SUBSEQUENT EVENTS
Management has evaluated subsequent events that occurred after December 31, 2020. During this period, up to the filing date of this Quarterly Report on Form 10-Q, management identified the following subsequent events:
•On January 13, 2021, the Company sold an additional $103.2 million of the retained Community Bank loan portfolio to Central Bank. The sale did not result in any material gain to the Company. The loans included in the sale were classified as held for sale at December 31, 2020.
•Beginning January 4, 2021, the Bank disbursed approximately $7.10 billion of the second round of Economic Impact Payments ("EIP") under the CAA, pursuant to the Company's amendment of its existing agreement with the U.S. Department Treasury's Bureau of the Fiscal Service ("Fiscal Service") entered into on December 27, 2020.
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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®, National Association ("MetaBank" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and MetaBank, 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 address, among others, the following subjects: future operating results; expectations in connection with the impact of the ongoing COVID-19 pandemic and related governmental actions on the Company and MetaBank; customer retention; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services, including those offered by the Meta Payment Systems, Refund Advantage, EPS Financial and Specialty Consumer Services divisions; credit quality; the level of net charge-offs on loans and leases and the adequacy of the allowance for credit losses; 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; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto including the deployment and efficacy of the COVID-19 vaccines, or other unusual and infrequently occurring events; 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 operates; 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”); 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 Bank's ability to maintain its Durbin Amendment exemption; 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 usage of Meta’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by our regulators; 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 and recent and potential changes in response to the ongoing COVID-19 pandemic such as the CARES Act and the rules and regulations that may be promulgated thereunder; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; 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; the impact of our participation as prepaid card issuer for the EIP program and potentially similar programs in the future; losses from fraudulent or illegal activity; technological risks and developments, and cyber threats, attacks or events; 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 on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2020, 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.
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GENERAL
The Company, a registered bank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national 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 December 31, 2020, compared to September 30, 2020, and the consolidated results of operations for the three months ended December 31, 2020 and 2019. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2020 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, 2020.
EXECUTIVE SUMMARY
Business Developments
The following highlights certain business developments during the quarter ended December 31, 2020:
•Began our new three-year program with Emerald Financial Services, LLC, a wholly-owned indirect subsidiary of H&R Block, Inc., which the Company announced in the fourth quarter of fiscal 2020. Have already moved more than $150 million in deposits and began issuing Emerald Prepaid Mastercard® to applicants.
•Completed negotiations with the Fiscal Service to disperse a second round of EIP stimulus payments through the distribution of prepaid cards. The Company began distributing cards under this authorization on January 4, 2021.
•Expanded our solar lending business, increasing our solar credit balance 29% to $323.9 million.
•Increased resources dedicated to our Environmental, Social, and Governance ("ESG") activities by hiring an experienced Vice President of ESG and Community Impact and forming a Board-level ESG committee to provide oversight.
Financial Highlights for the 2021 Fiscal First Quarter
The Company recorded net income of $28.0 million, or $0.84 per diluted share, for the three months ended December 31, 2020, compared to net income of $21.1 million, or $0.56 per diluted share, that was recorded for the fiscal 2020 first quarter. Total revenue for the fiscal 2021 first quarter was $111.5 million, compared to $102.1 million for the same quarter in fiscal 2020, an increase of 9%.
During the fiscal 2021 first quarter, the Company recognized net interest income of $66.0 million, NIM of 4.65% and net interest margin, tax-equivalent ("NIM, TE") of 4.67%. The Company's average gross loans and leases decreased by $239.5 million, or 6%, while average noninterest-bearing deposits increased by $2.15 billion, or 79%, when compared to the same quarter in fiscal 2020. Average deposits from the payments divisions for the fiscal 2021 first quarter increased nearly 83% to $5.07 billion when compared to the same quarter in fiscal 2020. A significant portion of the year-over-year increase reflected the Company's participation in the EIP program, as described further below. The growth in deposits led to excess cash balances held at the Federal Reserve during the fiscal 2021 first quarter. This increase in lower yielding cash balances resulted in a net drag to the net interest margin. Overall, the Company's cost of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021 first quarter, compared to 1.01% during the prior year quarter, primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits.
Noninterest income for the three months ended December 31, 2020 was $45.5 million, compared to $37.5 million for the same period of the prior year. This was primarily due to an increase within gain on sale of other, an increase in other income, and an increase in payments cards and deposit fees, partially offset by a decrease in rental income. The increase within gain on sale of other was primarily due to a loss on sale of foreclosed and repossessed assets recognized during the first quarter of fiscal year 2020.
46
Noninterest expense decreased 4% to $72.6 million for the fiscal 2021 first quarter, from $75.8 million for the same quarter of last year, primarily driven by decreases in compensation and benefits, other expense, tax product expense, operating lease depreciation, and amortization expense, partially offset by increases within impairment expense, legal and consulting expense, and card processing expense.
The Company repurchased 1,864,474 shares during the first quarter at an average price of $29.46. Through January 20, 2021, the Company repurchased an additional 300,000 of its shares, at a weighted average price of $38.73.
COVID-19 Business Update
As of December 31, 2020, the Company had 612 loans outstanding with total loan balances of $194.3 million originated as part of the PPP, compared with 689 loans outstanding with total loan balances of $219.0 million for the quarter ended September 30, 2020.
As of December 31, 2020, $84.2 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As of September 30, 2020, loans and leases totaling $170.0 million were within their deferment period. In addition, the Company has made other COVID-19 related modifications, of which $1.1 million were still active as of December 31, 2020 compared to $23.3 million at September 30, 2020. The majority of the other modifications were related to adjusting the type or amount of the customer's payments.
The Company's capital position remained strong as of December 31, 2020, even while absorbing the temporary impact resulting from the receipt of deposits in conjunction with EIP payments described below. In addition, the Company has options available that can be used to effectively manage capital levels, including a strong and flexible balance sheet.
EIP Program Update
The Bank is serving as the sole Financial Agent for distributing prepaid debit cards used in the EIP program. Under the first round of EIP, approximately $6.42 billion in stimulus payments on 3.6 million prepaid cards were mailed to individuals across the United States. The total balances remaining on the first round of EIP cards were $605.1 million as of December 31, 2020 and $569.2 million as of January 20, 2021.
On December 27, 2020, the U.S. Congress, through the CAA, directed the Internal Revenue Service (“IRS”) to distribute a second round of EIP via the U.S. Treasury to persons in the U.S. eligible to receive them. The Bank entered into an amendment of its existing agreement with the Fiscal Service, under which the Bank will act as a Financial Agent to Fiscal Service in connection with the provision of prepaid debit card services to disburse a portion of the EIP payments to eligible recipients via Bank-issued prepaid cards.
Under the second round, the Bank disbursed approximately $7.10 billion of EIP payments, with initial payments having begun January 4, 2021. The total balances remaining on the second round of EIP cards were $5.80 billion as of January 20, 2021.
While the EIP Program's impact to earnings is expected to be slightly positive, it continues to temporarily have a significant impact on cash and deposit balances, leading to a reduced NIM along with a corresponding impact on the Company's leverage capital ratios. In conjunction with the Program and its balance sheet impacts, the Bank was granted temporary exemption from its requirements to maintain minimum regulatory capital leverage ratios by the Officer of the Comptroller of the Currency due to deposits received as part of the EIP program. The influx of EIP deposits is not expected to have any material impact on the Company's risk-weighted capital ratios.
The Company is working with other banks to transfer deposits off-balance sheet in an effort to relieve the impact of the substantial influx of deposits related to the second round of EIP.
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FINANCIAL CONDITION
At December 31, 2020, the Company’s total assets increased by $1.17 billion to $7.26 billion compared to September 30, 2020, primarily due to a $1.16 billion increase in cash and cash equivalents.
Total cash and cash equivalents was $1.59 billion at December 31, 2020, increasing from $427.4 million at September 30, 2020. The increase primarily resulted from the receipt of EIP related deposits in the fiscal 2021 first quarter. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the FRB. At December 31, 2020, the Company did not have any federal funds sold.
The total investment portfolio decreased $51.3 million, or 4%, to $1.31 billion at December 31, 2020, compared to $1.36 billion at September 30, 2020, as maturities 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, 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 December 31, 2020 were issued by a U.S. Government agency or instrumentality. Of the total MBS at December 31, 2020, $430.8 million, at fair value, were classified as available for sale, and $5.2 million, at cost, were classified as held to maturity. Of the total investment securities at December 31, 2020, $797.4 million, at fair value, were classified as available for sale and $76.2 million, at cost, were classified as held to maturity. During the three-months ended December 31, 2020, the Company purchased $24.0 million of investment securities.
Loans held for sale at December 31, 2020 totaled $133.7 million, decreasing from $183.6 million at September 30, 2020. This decrease was primarily driven by the sale $129.8 million of the retained Community Bank loan portfolio to Central Bank during the fiscal 2021 first quarter.
The Company’s total loans and leases increased by $125.4 million, or 4%, to $3.44 billion at December 31, 2020, from $3.31 billion at September 30, 2020. The increase was primarily driven by increases in national lending loans and leases, partially offset by a decrease in community banking loans. See Note 6 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
National lending loans and leases increased $257.0 million, or 9% to $3.09 billion at December 31, 2020 compared to September 30, 2020. Within the National Lending portfolios, commercial finance loans and leases increased $115.1 million, tax services loans increased $89.5 million, consumer finance increased $26.9 million and warehouse finance increased $25.6 million at December 31, 2020 compared to September 30, 2020. The increase in commercial finance loan balances was largely driven by the term lending and asset based lending categories. The seasonality of the Company's tax services business led to the increase in tax services loans at December 31, 2020 compared to September 30, 2020.
Community banking loans decreased $131.6 million, or 27%, at December 31, 2020 compared to September 30, 2020, primarily attributable to $100.4 million of loan balances classified as held for sale along with continued principal payments and payoffs.
Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the Federal Reserve Bank. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in these stocks remained unchanged from September 30, 2020 at $27.1 million to December 31, 2020.
Total end-of-period deposits increased $1.23 billion, or 25%, at December 31, 2020 to $6.21 billion as compared to September 30, 2020, primarily driven by an increase in noninterest-bearing deposits of $1.22 billion, which was largely attributable to the balances on the EIP cards.
The average balance of total deposits and interest-bearing liabilities was $5.52 billion for the three-months ended December 31, 2020, compared to $5.13 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the three-months ended December 31, 2020 increased $2.15 billion, or 79%, to $4.88 billion compared to the same period in the prior year. These increases were primarily attributable to EIP related deposit balances.
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The Company's total borrowings decreased $1.5 million, or 1%, from $98.2 million at September 30, 2020 to $96.8 million at December 31, 2020. The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at December 31, 2020.
At December 31, 2020, the Company’s stockholders’ equity totaled $813.2 million, a decrease of $34.1 million, from $847.3 million at September 30, 2020. The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital. At December 31, 2020, the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution. See “Liquidity and Capital Resources” for further information.
Payments Noninterest-bearing Checking Deposits
The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's consolidated statement of financial condition. Negative balances can relate to any of the following payments functions:
–Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20.
–Discount fundings: The Company funds cards in an amount that is estimated to be less than final breakage values on card programs. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to one partner.
–Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category.
The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the payments division:
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | |||||||||
| Noninterest-bearing deposits | $ | 6,101,971 | $ | 4,960,276 | |||||||
| Prefunding | (441,082) | (528,131) | |||||||||
| Discount funding | (69,567) | (62,443) | |||||||||
| DDA overdrafts | (9,725) | (13,072) | |||||||||
| Noninterest-bearing checking, net | $ | 5,581,597 | $ | 4,356,630 | |||||||
RESULTS OF OPERATIONS
General
The Company recorded net income of $28.0 million, or $0.84 per diluted share, for the three months ended December 31, 2020, compared to net income of $21.1 million, or $0.56 per diluted share, for the three months ended December 31, 2019. Total revenue for the fiscal 2021 first quarter was $111.5 million, compared to $102.1 million for the same quarter in fiscal 2020, an increase of 9%. The increase in net income was primarily driven by an increase in noninterest income and a decrease in noninterest expense.
Net Interest Income
Net interest income for the fiscal 2021 first quarter increased by 2%, to $66.0 million from $64.7 million for the same quarter in fiscal 2020. The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall balances and yields realized on interest earning assets. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months ended December 31, 2020 decreased to 62%, from 72% for the three months ended December 31, 2019, while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 23% from 26% over that same period. These decreases were primarily due to the increase in interest-earning cash balances related to the EIP program.
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NIM was 4.65% in the fiscal 2021 first quarter, a decrease of 29 basis points from 4.94% in the fiscal 2020 first quarter. NIM,TE was 4.67% in the fiscal 2021 first quarter, a decrease of 32 basis points from 4.99% in the fiscal 2020 first quarter. The decreases in NIM and NIM, TE in the fiscal 2021 first quarter, compared to the same period of the prior year were primarily driven by the effects of the EIP program.
The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 116 basis points to 4.82% when comparing the fiscal 2021 first quarter to the same period of the prior fiscal year. The fiscal 2021 first quarter TEY on the securities portfolio decreased by 86 basis points to 1.79% compared to the same period of the prior year TEY of 2.65%. The decrease in TEY on the securities portfolio was primarily due to a lower interest rate environment during the current period compared to the prior year period while the decrease in TEY on average earning assets was primarily driven by excess low-yielding cash held at the Federal Reserve.
The Company’s average interest-earning assets for the fiscal 2021 first quarter increased by $432.9 million to $5.64 billion, from the comparable quarter in 2020. The increase was primarily attributable a significant increase in interest-earning cash driven by the effects of the EIP program. Total investment securities continued to decrease through sales of securities and cash flow from the Company's amortizing securities portfolio. Quarterly average loans and leases decreased $239.5 million, of which $665.0 million was related to a decrease in Community Banking loans partially offset by a $425.5 million increase in National Lending loans.
The Company’s average balance of total deposits and interest-bearing liabilities was $5.52 billion for the three months ended December 31, 2020, compared to $5.13 billion for the same period in the prior year, representing an increase of 8%. This increase was primarily driven by an increase in average noninterest-bearing deposits of $2.15 billion. The increase in average noninterest-bearing deposits was largely driven by the EIP related funding. Partially offsetting those increases were decreases in average wholesale deposits of $1.21 billion, average balances of total borrowings of $422.3 million, average time deposits of $97.5 million, and average money market deposits of $27.9 million.
Overall, the Company's cost of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021 first quarter, compared to 1.01% for the fiscal 2020 first quarter. This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits. The Company's overall cost of deposits was 0.06% in the fiscal 2021 first quarter, compared to 0.81% in the same quarter of 2020.
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. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.
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| Three Months Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Average Outstanding Balance | Interest Earned / Paid | Yield / Rate(1) | Average Outstanding Balance | Interest Earned / Paid | Yield / Rate(1) | |||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Cash & fed funds sold | $ | 820,108 | $ | 842 | 0.41 | % | $ | 99,597 | $ | 412 | 1.65 | % | |||||||||||||||||||||||
| Mortgage-backed securities | 438,610 | 2,123 | 1.92 | % | 376,358 | 2,389 | 2.53 | % | |||||||||||||||||||||||||||
| Tax exempt investment securities | 333,729 | 1,215 | 1.83 | % | 490,982 | 2,339 | 2.40 | % | |||||||||||||||||||||||||||
| Asset-backed securities | 326,315 | 1,200 | 1.46 | % | 303,885 | 2,354 | 3.08 | % | |||||||||||||||||||||||||||
| Other investment securities | 221,986 | 1,111 | 1.98 | % | 197,513 | 1,429 | 2.88 | % | |||||||||||||||||||||||||||
| Total investments | 1,320,640 | 5,649 | 1.79 | % | 1,368,738 | 8,511 | 2.65 | % | |||||||||||||||||||||||||||
| Total commercial finance | 2,417,691 | 45,630 | 7.49 | % | 1,980,509 | 44,781 | 9.00 | % | |||||||||||||||||||||||||||
| Total consumer finance | 239,618 | 4,748 | 7.86 | % | 270,612 | 5,790 | 8.51 | % | |||||||||||||||||||||||||||
| Total tax services | 25,104 | 8 | 0.13 | % | 24,429 | 33 | 0.54 | % | |||||||||||||||||||||||||||
| Total warehouse finance | 284,199 | 4,933 | 6.89 | % | 265,564 | 4,174 | 6.25 | % | |||||||||||||||||||||||||||
| National Lending loans and leases | 2,966,612 | 55,319 | 7.40 | % | 2,541,114 | 54,778 | 8.58 | % | |||||||||||||||||||||||||||
| Community Banking loans | 529,085 | 6,336 | 4.75 | % | 1,194,082 | 13,924 | 4.64 | % | |||||||||||||||||||||||||||
| Total loans and leases | 3,495,697 | 61,655 | 7.00 | % | 3,735,196 | 68,702 | 7.32 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 5,636,445 | $ | 68,146 | 4.82 | % | 5,203,531 | $ | 77,625 | 5.98 | % | |||||||||||||||||||||||||
| Noninterest-earning assets | 845,378 | 918,973 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 6,481,823 | $ | 6,122,504 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
Interest-bearing checking(2) | $ | 162,748 | $ | — | — | % | $ | 163,693 | $ | 153 | 0.37 | % | |||||||||||||||||||||||
| Savings | 52,198 | 2 | 0.01 | % | 48,776 | 9 | 0.08 | % | |||||||||||||||||||||||||||
| Money markets | 52,620 | 39 | 0.30 | % | 80,528 | 205 | 1.01 | % | |||||||||||||||||||||||||||
| Time deposits | 17,390 | 57 | 1.30 | % | 114,924 | 595 | 2.06 | % | |||||||||||||||||||||||||||
| Wholesale deposits | 261,136 | 699 | 1.06 | % | 1,472,820 | 8,378 | 2.26 | % | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 546,092 | 797 | 0.58 | % | 1,880,741 | 9,340 | 1.98 | % | |||||||||||||||||||||||||||
| Overnight fed funds purchased | 11 | — | 0.25 | % | 302,804 | 1,450 | 1.91 | % | |||||||||||||||||||||||||||
| FHLB advances | — | — | — | % | 110,000 | 678 | 2.45 | % | |||||||||||||||||||||||||||
| Subordinated debentures | 73,822 | 1,147 | 6.16 | % | 73,658 | 1,160 | 6.26 | % | |||||||||||||||||||||||||||
| Other borrowings | 23,870 | 203 | 3.37 | % | 33,589 | 346 | 4.10 | % | |||||||||||||||||||||||||||
| Total borrowings | 97,703 | 1,350 | 5.48 | % | 520,051 | 3,634 | 2.78 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 643,795 | 2,147 | 1.32 | % | 2,400,792 | 12,974 | 5.15 | % | |||||||||||||||||||||||||||
| Noninterest-bearing deposits | 4,880,352 | — | — | % | 2,732,062 | — | — | % | |||||||||||||||||||||||||||
| Total deposits and interest-bearing liabilities | 5,524,147 | $ | 2,147 | 0.15 | % | 5,132,854 | $ | 12,974 | 1.01 | % | |||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 151,528 | 150,319 | |||||||||||||||||||||||||||||||||
| Total liabilities | 5,675,675 | 5,283,173 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 806,148 | 839,331 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 6,481,823 | $ | 6,122,504 | |||||||||||||||||||||||||||||||
| Net interest income and net interest rate spread including noninterest-bearing deposits | $ | 65,999 | 4.67 | % | $ | 64,651 | 4.97 | % | |||||||||||||||||||||||||||
| Net interest margin | 4.65 | % | 4.94 | % | |||||||||||||||||||||||||||||||
| Tax-equivalent effect | 0.02 | % | 0.05 | % | |||||||||||||||||||||||||||||||
Net interest margin, tax-equivalent(3) | 4.67 | % | 4.99 | % | |||||||||||||||||||||||||||||||
(1) Tax rate used to arrive at the TEY for the three months ended December 31, 2020 and 2019 was 21%.
(2) Of the total balance, $162.5 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.
(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. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.
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Provision for Credit Losses
The Company recorded a $6.1 million provision for loan and lease losses for the three months ended December 31, 2020, as compared to a $3.4 million provision for loan and lease losses for the same period of the prior year. The increase in provision for the quarter ended December 31, 2020 compared to the same period of the prior year was primarily driven by the commercial finance and consumer finance portfolios, partially offset by a decrease within the retained community bank portfolio. The Company adopted CECL effective October 1, 2020, and its day one entry to increase the allowance for credit losses was $12.8 million. While this specific adoption amount did not have a direct impact to provision for credit loss for the December 31, 2020 quarter as the cumulative effect adjustment was recorded to retained earnings, the CECL accounting standard does accelerate the recognition of the reserves due to the forward-looking elements of the modeling. See Note 2 and Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Noninterest Income
Noninterest income for the fiscal 2021 first quarter increased to $45.5 million from $37.5 million for the same period in the prior fiscal year. This was due primarily to an increase within gain on sale of other, an increase in other income, and an increase in payments cards and deposit fees, partially offset by a decrease in rental income. The increase within gain on sale of other was primarily due to a loss on sale of foreclosed and repossessed assets recognized during the first quarter of fiscal year 2020. The increase within other income was primarily due to the receipt of a portion of the Company’s liquidation insurance claims of unearned premiums on the ReliaMax estate related to the Company’s student loan portfolio. The amount received in the first quarter of fiscal 2021 was $3.5 million.
Noninterest Expense
Noninterest expense decreased 4% to $72.6 million for the fiscal 2021 first quarter, from $75.8 million for the same quarter of fiscal 2020. The decrease in noninterest expense when comparing the fiscal 2021 first quarter to the same period of the prior year was primarily driven by decreases in compensation and benefits, other expense, tax product expense, operating lease depreciation, and amortization expense, partially offset by increases within impairment expense, legal and consulting expense, and card processing expense.
Income Tax Expense
The Company recorded an income tax expense of $3.5 million, representing an effective tax rate of 10.8%, for the fiscal 2021 first quarter, compared to an income tax expense of $0.7 million, representing an effective tax rate of 3.0%, for the fiscal 2020 first quarter. The recorded income tax expense during the current quarter was primarily due to ratably recognized investment tax credits and lower forecast earnings due to COVID-19.
The Company originated $38.5 million in solar leases during the fiscal 2021 first quarter, compared to $17.9 million during the fiscal 2020 first quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each 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.
Nonperforming 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.
52
The Company believes that the level of allowance for credit losses at December 31, 2020 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 the section below titled “Allowance for Credit Losses” for further information.
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The table below sets forth the amounts and categories of nonperforming assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.
| (Dollars in Thousands) | December 31, 2020 | September 30, 2020 | |||||||||
| Nonperforming loans and leases | |||||||||||
| Nonaccruing loans and leases: | |||||||||||
| Term lending | $ | 13,741 | $ | 16,274 | |||||||
| Asset based lending | 917 | — | |||||||||
| Factoring | 842 | 1,096 | |||||||||
| Lease financing | 2,607 | 3,583 | |||||||||
| SBA/USDA | 600 | 600 | |||||||||
| Commercial finance | 18,707 | 21,553 | |||||||||
| Total National Lending | 18,707 | 21,553 | |||||||||
| Commercial real estate and operating | 18,456 | 580 | |||||||||
| Consumer one-to-four family real estate and other | 164 | 50 | |||||||||
| Agricultural real estate and operating | 1,769 | 1,769 | |||||||||
| Total Community Banking | 20,389 | 2,399 | |||||||||
| Total | 39,096 | 23,952 | |||||||||
| Accruing loans and leases delinquent >89 days past due: | |||||||||||
| Held for sale loans | — | — | |||||||||
| Term lending | 385 | 266 | |||||||||
| Lease financing | 1,042 | 4,344 | |||||||||
| Insurance premium finance | 665 | 2,364 | |||||||||
| SBA/USDA | — | 427 | |||||||||
| Commercial finance | 2,092 | 7,401 | |||||||||
| Consumer credit products | 457 | 499 | |||||||||
| Other consumer finance | 675 | 373 | |||||||||
| Consumer finance | 1,132 | 872 | |||||||||
| Tax services | — | 1,743 | |||||||||
| Total National Lending | 3,224 | 10,016 | |||||||||
| Commercial real estate and operating | — | 50 | |||||||||
| Agricultural real estate and operating | — | — | |||||||||
| Total Community Banking | — | 50 | |||||||||
| Total | 3,224 | 10,066 | |||||||||
| Total nonperforming loans and leases | 42,320 | 34,018 | |||||||||
| Other assets | |||||||||||
| Nonperforming operating leases | 3,713 | 4,045 | |||||||||
| Foreclosed and repossessed assets: | |||||||||||
| Commercial finance | 7,178 | 9,957 | |||||||||
| Commercial real estate and operating | 8 | — | |||||||||
| Total | 7,186 | 9,957 | |||||||||
| Total other assets | 10,899 | 14,002 | |||||||||
| Total nonperforming assets | $ | 53,219 | $ | 48,020 | |||||||
| Total as a percentage of total assets | 0.73 | % | 0.79 | % | |||||||
At December 31, 2020, nonperforming loans and leases totaled $42.3 million, representing 1.18% of total loans and leases, compared to $34.0 million, or 0.97% of total loans and leases at September 30, 2020.
54
As of December 31, 2020, $84.2 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As of September 30, 2020, loans and leases totaling $170.0 million were within their deferment period. In addition, the Company has made other COVID-19 related modifications, of which $1.1 million were still active as of December 31, 2020 compared to $23.3 million at September 30, 2020. The majority of the other modifications were related to adjusting the type or amount of the customer's payments.
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 December 31, 2020, the Company had classified $78.6 million of its assets as substandard, $3.5 million as doubtful and none as loss. At September 30, 2020, the Company classified $61.6 million of its assets as substandard, $6.3 million as doubtful and none as loss.
Allowance for Credit Losses. Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a CECL methodology to determine the ACL for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions.
The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, generally this means loans and leases identified as troubled debt restructures or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.
Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.
55
At December 31, 2020, the Company had established an ACL totaling $72.4 million, compared to $56.2 million at September 30, 2020. The increase in the allowance at December 31, 2020 when compared to September 30, 2020, was primarily due to the adoption of the CECL accounting standard noted above, as well as additional increases during the fiscal 2021 first quarter in the commercial finance portfolio of $2.8 million, tax services portfolio of $1.4 million, and consumer finance portfolio of $1.4 million, partially offset by an additional decrease within the retained community bank portfolio of $2.2 million. The CECL methodology requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions, which led to the increase in the ACL as of the October 1, 2020 adoption date.
The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases.
| As of the Period Ended | ||||||||||||||||||||
| December 31, 2020 | October 1, 2020(1) | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 | |||||||||||||||
| Commercial finance | 1.88 | % | 1.85 | % | 1.30 | % | 1.36 | % | 1.28 | % | 0.80 | % | ||||||||
| Consumer finance | 4.39 | % | 4.31 | % | 1.64 | % | 1.75 | % | 1.74 | % | 2.22 | % | ||||||||
| Tax services | 1.53 | % | 0.06 | % | 0.06 | % | 59.67 | % | 22.22 | % | 1.62 | % | ||||||||
| Warehouse finance | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | ||||||||
| National Lending | 1.89 | % | 1.86 | % | 1.20 | % | 1.68 | % | 1.92 | % | 0.90 | % | ||||||||
| Community Banking | 4.01 | % | 3.37 | % | 4.59 | % | 2.55 | % | 1.49 | % | 0.68 | % | ||||||||
| Total loans and leases | 2.10 | % | 2.08 | % | 1.70 | % | 1.88 | % | 1.81 | % | 0.84 | % | ||||||||
(1) Represents the Company's allowance coverage ratio upon the adoption of the Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and allowance balances plus the CECL allowance adjustment.
Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company continued to assess each of its loan and lease portfolios during the fiscal 2021 first quarter. The increase from September 30, 2020 to December 31, 2020 was primarily due to the adoption of ASU 2016-13 on October 1, 2020. The increase in the tax services coverage rates were driven by typical seasonal activity. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.
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 ACL at December 31, 2020 reflected an appropriate allowance against inherent credit losses from the lending portfolio. Although the Company maintains its ACL 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 ACL is subject to review by the OCC, which can require the establishment of additional general or specific allowances.
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 ACL, 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, 2020. There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2021.
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LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, derived principally through its payments divisions, 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 December 31, 2020, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.35 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.
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. 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. 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 December 31, 2020, 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 December 31, 2020 | Company | Bank | Action Provisions | Provisions | |||||||||||||||||||
| Tier 1 leverage capital ratio | 7.39 | % | 8.60 | % | 4.00 | % | 5.00 | % | |||||||||||||||
| Common equity Tier 1 capital ratio | 10.72 | 12.87 | 4.50 | 6.50 | |||||||||||||||||||
| Tier 1 capital ratio | 11.07 | 12.89 | 6.00 | 8.00 | |||||||||||||||||||
| Total capital ratio | 14.14 | 14.14 | 8.00 | 10.00 | |||||||||||||||||||
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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:
| (Dollars in Thousands) | Standardized Approach(1) December 31, 2020 | ||||
| Total stockholders' equity | $ | 813,210 | |||
| Adjustments: | |||||
| LESS: Goodwill, net of associated deferred tax liabilities | 301,999 | ||||
| LESS: Certain other intangible assets | 39,403 | ||||
| LESS: Net deferred tax assets from operating loss and tax credit carry-forwards | 24,105 | ||||
| LESS: Net unrealized gains on available-for-sale securities | 19,894 | ||||
| LESS: Noncontrolling interest | 1,536 | ||||
| ADD: Adoption of Accounting Standards Update 2016-13 | 10,439 | ||||
Common Equity Tier 1 Capital (1) | 436,712 | ||||
| Long-term borrowings and other instruments qualifying as Tier 1 | 13,661 | ||||
| Tier 1 minority interest not included in common equity tier 1 capital | 749 | ||||
| Total Tier 1 Capital | 451,122 | ||||
| Allowance for loan and lease losses | 51,070 | ||||
| Subordinated debentures (net of issuance costs) | 73,850 | ||||
| Total Capital | $ | 576,042 | |||
(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. 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.
| (Dollars in Thousands) | December 31, 2020 | ||||
| Total Stockholders' Equity | $ | 813,210 | |||
| LESS: Goodwill | 309,505 | ||||
| LESS: Intangible assets | 39,660 | ||||
| Tangible common equity | 464,045 | ||||
| LESS: AOCI | 20,119 | ||||
| Tangible common equity excluding AOCI | $ | 443,926 | |||
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 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.
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, 2020 for a summary of our contractual obligations as of September 30, 2020. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2020 through December 31, 2020.
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OFF-BALANCE SHEET FINANCING ARRANGEMENTS
For discussion of the Company’s off-balance sheet financing arrangements at December 31, 2020, see Note 15 to our Condensed 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 15 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 due to 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 payments 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.
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 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 analysis. 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.
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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 lending 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. The Company performs 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 -100, +100, +200, +300, and +400 basis point parallel shifts in market interest rates over the next one-year period.
The Company was within Board approved policy limits for all interest rate scenarios using the snapshot as of December 31, 2020. The following table shows the results of the scenarios as of December 31, 2020:
| 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 | -100 | Base | 100 | 200 | 300 | 400 | ||||||||||||||||||||||||||||||||||
| Total interest-sensitive income | 6,438,633 | 248,670 | 257,579 | 292,907 | 328,098 | 364,143 | 400,195 | ||||||||||||||||||||||||||||||||||
| Total interest-sensitive expense | 635,443 | 1,163 | 1,459 | 3,735 | 6,021 | 8,335 | 10,687 | ||||||||||||||||||||||||||||||||||
| Net interest-sensitive income | 5,803,190 | 247,507 | 256,120 | 289,172 | 322,077 | 355,808 | 389,508 | ||||||||||||||||||||||||||||||||||
| Percentage change from base | — | -3.4 | % | — | % | 12.9 | % | 25.8 | % | 38.9 | % | 52.1 | % | ||||||||||||||||||||||||||||
| Board policy limits | — | -8.0 | % | — | % | -8.0 | % | -10.0 | % | -15.0 | % | -20.0 | % | ||||||||||||||||||||||||||||
The EAR analysis reported at December 31, 2020, shows that Total Interest Sensitive Income will change more rapidly than Total Interest Sensitive Expense over the next year. IRR is a snapshot in time. The Company’s business and deposits are 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 -100, +100, +200, +300 and +400 basis point parallel shifts in market interest rates.
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The Company was within Board policy limits for all scenarios. The following table shows the results of the scenarios as December 31, 2020:
Economic Value Sensitivity | ||||||||||||||||||||||||||||||||
| Standard (Parallel Shift) | ||||||||||||||||||||||||||||||||
| Economic Value of Equity at Risk% | ||||||||||||||||||||||||||||||||
| -100 | 100 | 200 | 300 | 400 | ||||||||||||||||||||||||||||
| Percentage change from base | -15.5 | % | 14.8 | % | 26.4 | % | 36.1 | % | 44.6 | % | ||||||||||||||||||||||
| Board policy limits | -10.0 | % | -10.0 | % | -20.0 | % | -25.0 | % | -35.0 | % | ||||||||||||||||||||||
The EVE at risk reported at December 31, 2020 shows that the economic value of equity position will be more sensitive to changes in interest rates due to the large amount of noninterest-bearing funding.
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.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Management, under the direction of its Chief Executive Officer and Chief Financial Officer, is responsible for maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "1934 Act") that are designed to ensure that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Quarterly Report on Form 10-Q, management evaluated the Company's disclosure controls and procedures. The evaluation was performed under the direction of the Company's Chief Executive Officer and Chief Financial Officer to determine the effectiveness, as of December 31, 2020, of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2020, the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on this evaluation, management concluded that, as of the end of the period covered by this report, there were no 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 1934 Act) during the fiscal first 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.
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META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings
See “Legal Proceedings” under Note 15 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, 2020. There were no material changes to those risk factors during the three months ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities.
Meta's Board of Directors authorized a 7,500,000 share repurchase program on November 20, 2019 that is scheduled to expire on December 31, 2022. The share repurchase program became effective on November 21, 2019. The Company suspended its share repurchase activity in March 2020 and resumed repurchase activity during September 2020. The table below sets forth information regarding repurchases of our common stock during the fiscal 2020 first quarter.
| Period | Total Number of Shares Repurchased(1) | Average Price Paid per Share(1)(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that may yet be Purchased Under the Plans or Programs | |||||||||||||||||||
| October 1 to 31 | 921,641 | $ | 23.29 | 850,000 | 3,299,631 | ||||||||||||||||||
| November 1 to 30 | 410,960 | 34.12 | 403,500 | 2,896,131 | |||||||||||||||||||
| December 1 to 31 | 610,974 | 34.68 | 610,974 | 2,285,157 | |||||||||||||||||||
| Total | 1,943,575 | 1,864,474 | |||||||||||||||||||||
(1) All shares in these columns reflect shares acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit awards, which vested during the quarter.
(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.
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Item 6. Exhibits.
| Exhibit Number | Description | ||||
| Employment Agreement, effective as of October 1, 2020, among MetaBank, Meta Financial Group, Inc. and Bradley C. Hanson, filed on November 30, 2020 as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K and incorporated herein by reference. | |||||
| Employment Agreement, effective as of October 1, 2020, among MetaBank, Meta Financial Group, Inc. and Glen W. Herrick, filed on November 30, 2020 as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K and incorporated herein by reference. | |||||
| Independent Contractor Agreement, effective as of December 14, 2020, by MetaBank NA and Michael Goik, filed on December 17, 2020 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference. | |||||
| 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 | Interactive Data Files (formatted in iXBRL) pursuant to Rule 405 of Regulation S-T. | ||||
| 104 | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101). | ||||
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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: February 8, 2021 | By: | /s/ Bradley C. Hanson | ||||||
| Bradley C. Hanson, | ||||||||
| President, Chief Executive Officer and Director | ||||||||
Date: February 8, 2021 | By: | /s/ Glen W. Herrick | ||||||
| Glen W. Herrick, Executive Vice President | ||||||||
| and Chief Financial Officer | ||||||||
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