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 (Check one):Act:
Item 1. Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
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, 20172022 included in MetaPathward Financial, Group, Inc.’s (“Meta Financial”Pathward” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 29, 2017.22, 2022. 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 month periodand nine months ended December 31, 2017June 30, 2023 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2018.2023.
InCertain prior fiscal 2017,year amounts have been reclassified to conform to the Company early adopted Accounting Standards Updatecurrent 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") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The requirement to report
Significant accounting policies in effect and disclosed within the excess tax benefit related to settlements of share-based payment awards in earnings as an increase or (decrease) to income tax expense has been applied utilizing the prospective method. While the adoption of ASU 2016-09 requires retrospective application to all fiscal year periods presented, the Company elected to not recast previously reportedCompany’s most recent audited consolidated financial statements as the impact was considered insignificant. However, the Company reclassified stock compensation from financing to operating activities on the Consolidated Statement of Cash Flows as of December 31, 2017 and December 31, 2016.
NOTE 2. CREDIT DISCLOSURES
The allowance for loan losses represents management’s estimate of probable loan losses which have been incurred as of the date of the consolidated financial statements. The allowance for loan losses is increased by a provision for loan losses charged to expense and decreased by charge-offs (net of recoveries). Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management may periodically allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.
Loans are considered impaired if full principal or interest payments are not probable in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers loans not considered impaired and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Homogeneous loan populations are collectively evaluated for impairment. These loan populations may include commercial insurance premium finance loans, residential first mortgage loans secured by one-to-four family residences, residential construction loans, home equity and second mortgage loans, and tax product loans. Commercial and agricultural loans as well as mortgage loans secured by other properties are monitored regularly by the Bank given the larger balances. When analysis of the borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business is not adequate to meet its debt service requirements, the individual loan or loan relationship is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 210 days or more for commercial insurance premium finance, 180 days or more for tax and other national lending loans and 90 days or more for other loans. Non-accrual loans and all troubled debt restructurings are considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans receivable at December 31, 2017 and September 30, 2017 were as follows:
|
| | | | | | | |
| | December 31, 2017 | | September 30, 2017 |
| | (Dollars in Thousands) |
| 1-4 Family Real Estate | $ | 203,967 |
| | $ | 196,706 |
|
| Commercial and Multi-Family Real Estate | 654,029 |
| | 585,510 |
|
| Agricultural Real Estate | 61,303 |
| | 61,800 |
|
| Consumer | 274,981 |
| | 163,004 |
|
| Commercial Operating | 56,516 |
| | 35,759 |
|
| Agricultural Operating | 24,696 |
| | 33,594 |
|
| Commercial Insurance Premium Finance | 235,671 |
| | 250,459 |
|
| Total Loans Receivable | 1,511,163 |
| | 1,326,832 |
|
| | | | |
| Allowance for Loan Losses | (8,862 | ) | | (7,534 | ) |
| Net Deferred Loan Origination Fees | (2,023 | ) | | (1,461 | ) |
| Total Loans Receivable, Net | $ | 1,500,278 |
| | $ | 1,317,837 |
|
Activity in the allowance for loan losses and balances of loans receivable by portfolio segment2022 remain substantially unchanged, except for the three months ended December 31, 2017following:
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Pathward Financial, Inc. ("Pathward Financial" or the “Company” or "us"), a registered bank holding company located in Sioux Falls, South Dakota, and 2016 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1-4 Family
Real Estate | | Commercial and
Multi-Family
Real Estate | | Agricultural
Real Estate | | Consumer | | Commercial
Operating | | Agricultural
Operating | | CML Insurance
Premium
Finance | | Unallocated | | Total |
| | (Dollars in Thousands) |
| Three Months Ended December 31, 2017 | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 803 |
| | $ | 2,670 |
| | $ | 1,390 |
| | $ | 6 |
| | $ | 158 |
| | $ | 1,184 |
| | $ | 796 |
| | $ | 527 |
| | $ | 7,534 |
|
| Provision (recovery) for loan losses | (118 | ) | | 364 |
| | (210 | ) | | 297 |
| | 690 |
| | (380 | ) | | 51 |
| | 374 |
| | 1,068 |
|
| Charge offs | (31 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (129 | ) | | — |
| | (160 | ) |
| Recoveries | — |
| | — |
| | — |
| | 367 |
| | 46 |
| | — |
| | 7 |
| | — |
| | 420 |
|
| Ending balance | $ | 654 |
| | $ | 3,034 |
| | $ | 1,180 |
| | $ | 670 |
| | $ | 894 |
| | $ | 804 |
| | $ | 725 |
| | $ | 901 |
| | $ | 8,862 |
|
| | | | | | | | | | | | | | | | | | |
| Ending balance: individually evaluated for impairment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Ending balance: collectively evaluated for impairment | 654 |
| | 3,034 |
| | 1,180 |
| | 670 |
| | 894 |
| | 804 |
| | 725 |
| | 901 |
| | 8,862 |
|
| Total | $ | 654 |
| | $ | 3,034 |
| | $ | 1,180 |
| | $ | 670 |
| | $ | 894 |
| | $ | 804 |
| | $ | 725 |
| | $ | 901 |
| | $ | 8,862 |
|
| | | | | | | | | | | | | | | | | | |
| Loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance: individually
evaluated for impairment | 95 |
| | 707 |
| | — |
| | 61 |
| | — |
| | 1,052 |
| | — |
| | — |
| | 1,915 |
|
Ending balance: collectively
evaluated for impairment | 203,872 |
| | 653,322 |
| | 61,303 |
| | 274,920 |
| | 56,516 |
| | 23,644 |
| | 235,671 |
| | — |
| | 1,509,248 |
|
| Total | $ | 203,967 |
| | $ | 654,029 |
| | $ | 61,303 |
| | $ | 274,981 |
| | $ | 56,516 |
| | $ | 24,696 |
| | $ | 235,671 |
| | $ | — |
| | $ | 1,511,163 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1-4 Family
Real Estate | | Commercial and
Multi-Family
Real Estate | | Agricultural
Real Estate | | Consumer | | Commercial
Operating | | Agricultural
Operating | | CML Insurance
Premium
Finance | | Unallocated | | Total |
| | (Dollars in Thousands) |
| Three Months Ended December 31, 2016 | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 654 |
| | $ | 2,198 |
| | $ | 142 |
| | $ | 51 |
| | $ | 117 |
| | $ | 1,332 |
| | $ | 588 |
| | $ | 553 |
| | $ | 5,635 |
|
| Provision (recovery) for loan losses | — |
| | (286 | ) | | 334 |
| | (28 | ) | | 691 |
| | (3 | ) | | 110 |
| | 25 |
| | 843 |
|
| Charge offs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (118 | ) | | — |
| | (118 | ) |
| Recoveries | — |
| | — |
| | — |
| | 24 |
| | 5 |
| | 12 |
| | 14 |
| | — |
| | 55 |
|
| Ending balance | $ | 654 |
| | $ | 1,912 |
| | $ | 476 |
| | $ | 47 |
| | $ | 813 |
| | $ | 1,341 |
| | $ | 594 |
| | $ | 578 |
| | $ | 6,415 |
|
| | | | | | | | | | | | | | | | | | |
Ending balance: individually
evaluated for impairment | 11 |
| | — |
| | — |
| | — |
| | 339 |
| | — |
| | — |
| | — |
| | 350 |
|
Ending balance: collectively
evaluated for impairment | 643 |
| | 1,912 |
| | 476 |
| | 47 |
| | 474 |
| | 1,341 |
| | 594 |
| | 578 |
| | 6,065 |
|
| Total | $ | 654 |
| | $ | 1,912 |
| | $ | 476 |
| | $ | 47 |
| | $ | 813 |
| | $ | 1,341 |
| | $ | 594 |
| | $ | 578 |
| | $ | 6,415 |
|
| | | | | | | | | | | | | | | | | | |
| Loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending balance: individually
evaluated for impairment | 190 |
| | 429 |
| | — |
| | — |
| | 505 |
| | — |
| | — |
| | — |
| | 1,124 |
|
Ending balance: collectively
evaluated for impairment | 172,687 |
| | 440,083 |
| | 64,014 |
| | 173,164 |
| | 50,319 |
| | 33,617 |
| | 179,508 |
| | — |
| | 1,113,392 |
|
| Total | $ | 172,877 |
| | $ | 440,512 |
| | $ | 64,014 |
| | $ | 173,164 |
| | $ | 50,824 |
| | $ | 33,617 |
| | $ | 179,508 |
| | $ | — |
| | $ | 1,114,516 |
|
Federal regulations promulgated by the Bank'sits wholly-owned subsidiaries. The Company's subsidiaries include Pathward®, National Association ("Pathward®, N.A." or "Pathward" or "the “Bank”), a national bank whose primary federal regulator is the Office of the Comptroller of the Currency (the "OCC"), and Pathward Venture Capital, LLC, a wholly-owned service corporation subsidiary of Pathward, N.A. which invests in companies in the financial services industry. All significant intercompany balances and transactions have been eliminated. The Company also owns 100% of First Midwest Financial Capital Trust I (the “Trust”), which was formed in July 2001 for the purpose of issuing trust preferred securities, and Crestmark Capital Trust I, which was acquired from the Crestmark Acquisition in August 2018. The Trust and Crestmark Capital Trust I are not included in the Consolidated Financial Statements of the Company.
In addition, the Company is a variable interest holder in certain entities in which the equity holders do not have the characteristics of a controlling financial interest or where the entity does not have enough equity at risk to finance its activities without additional subordinated financial support (referred to as variable interest entities or "VIEs"). The Company's variable interest arises from contractual ownership or other monetary interests that change with fluctuations in the VIE's net asset value. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impacts the VIE's economic performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE. Further, the Company assesses whether or not the Company is the primary beneficiary of a VIE on an ongoing basis. If the determination is made that the Company is the primary beneficiary, then that entity is included in the Consolidated Financial Statements.
Noncontrolling interests represent the portion of net income and equity attributable to third-party owners of consolidated subsidiaries that are not wholly-owned by Pathward Financial. All of the Company's noncontrolling interests relate to the Company's Commercial Finance business line.
Variable Interest Entities
In the normal course of business, the Company enters into off-balance sheet transactions with special purpose entities ("SPEs"), which can be structured as corporations, trusts, limited liability companies, or partnerships and are established for a limited purpose. Currently, the Company utilizes a SPE facility for certain term lending products within the Company's Commercial Finance business line. The Company participated in the structuring of the SPE, has a minority ownership interest in the SPE, and acts as servicer for the SPE in exchange for a servicing fee. Pathward is not the primary beneficiary of the SPE as our risk of loss or right to benefits from the SPE are not significant. As of June 30, 2023, there are $9.9 million of commercial term loans held at the SPE, and the Company’s equity investment in the SPE is $0.9 million. The Company’s maximum exposure to loss from the SPE is limited to its equity investment. As of June 30, 2023, there are $3.0 million of commercial term loans classified as held for sale related to this VIE. Additional information on loans transferred during the period is included in Note 5. Loans and Leases, Net.
Loan Servicing and Transfers of Financial Assets
Transfers of loans, portions of loans meeting the definition of a participating interest, and other financial assets are accounted for as sales on the transaction settlement date when control has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of such right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through a repurchase agreement or other means. Upon sale, the loans or other financial assets are derecognized from the Company’s Consolidated Statements of Financial Condition. If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the loans or other financial assets remaining on the Company’s Consolidated Statements of Financial Condition and proceeds recognized as a liability.
The Company sells loan participations, generally without recourse, in both the commercial and consumer segments. The Company also sells commercial Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") loans to third parties, generally without recourse. The Bank generally retains the right to service the sold loans for a fee. If the fee is determined commensurate and customary with market terms, no servicing asset or liability is recorded. Any fee that is above or below market terms results in a servicing asset or liability and is included within Other Assets on the Consolidated Statements of Financial Condition.
The following ASU became effective for the Company on October 1, 2022, and did not have a material impact on the Company’s significant accounting policies or Condensed Consolidated Financial Statements:
–ASU 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments.
NOTE 3. SIGNIFICANT EVENTS
Rebranding
On December 7, 2021, the Company executed a Purchase Agreement (the “Agreement”) with Beige Key, LLC (the “Assignee”) for the sale of all of the Company’s worldwide right, title and interest in and to company names and tradenames including Meta and other "Meta" formative names including MetaBank and Meta Financial Group, and the domain names, social media accounts and goodwill associated with the foregoing (collectively, the “Meta” tradenames) in exchange for $60.0 million in cash. Subject to the terms and conditions set forth in the Agreement, the Company had one year from the Agreement execution date to phase out and cease all use of the Meta tradenames. The Company received $50.0 million upon execution and delivery of the Agreement and was reflected in noninterest income for the fiscal year ended September 30, 2022. The remaining $10.0 million was received by the Company upon completion of phase out activities during the quarter ended December 31, 2022. There have been no additional rebrand activities since completion of these activities.
NOTE 4. 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 |
| Debt Securities AFS | | | | |
| At June 30, 2023 | | | | |
| Corporate securities | $ | 25,000 | | $ | — | | $ | (6,250) | | $ | 18,750 | |
| SBA securities | 98,342 | | — | | (7,737) | | 90,605 | |
| Obligations of states and political subdivisions | 2,384 | | — | | (73) | | 2,311 | |
| Non-bank qualified obligations of states and political subdivisions | 272,818 | | — | | (34,443) | | 238,375 | |
| Asset-backed securities | 265,794 | | — | | (11,228) | | 254,566 | |
| Mortgage-backed securities | 1,526,300 | | — | | (216,636) | | 1,309,664 | |
| Total debt securities AFS | $ | 2,190,638 | | $ | — | | $ | (276,367) | | $ | 1,914,271 | |
| At September 30, 2022 | | | | |
| Corporate securities | $ | 25,000 | | $ | — | | $ | (2,813) | | $ | 22,187 | |
| SBA securities | 105,238 | | — | | (7,470) | | 97,768 | |
| Obligations of states and political subdivisions | 2,469 | | — | | (125) | | 2,344 | |
| Non-bank qualified obligations of states and political subdivisions | 290,754 | | — | | (26,971) | | 263,783 | |
| Asset-backed securities | 160,806 | | — | | (13,016) | | 147,790 | |
| Mortgage-backed securities | 1,581,452 | | — | | (232,455) | | 1,348,997 | |
| Total debt securities AFS | $ | 2,165,719 | | $ | — | | $ | (282,850) | | $ | 1,882,869 | |
| | | | |
| Debt Securities HTM | | | | |
| At June 30, 2023 | | | | |
| Non-bank qualified obligations of states and political subdivisions | $ | 35,450 | | $ | — | | $ | (3,822) | | $ | 31,628 | |
| Mortgage-backed securities | 2,275 | | — | | (233) | | 2,042 | |
| Total debt securities HTM | $ | 37,725 | | $ | — | | $ | (4,055) | | $ | 33,670 | |
| At September 30, 2022 | |
| Non-bank qualified obligations of states and political subdivisions | $ | 39,093 | | $ | — | | $ | (3,190) | | $ | 35,903 | |
| Mortgage-backed securities | 2,589 | | — | | (321) | | 2,268 | |
| Total debt securities HTM | $ | 41,682 | | $ | — | | $ | (3,511) | | $ | 38,171 | |
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 | Gross Unrealized (Losses) | | Fair
Value | Gross Unrealized (Losses) | | Fair
Value | Gross Unrealized (Losses) |
| Debt Securities AFS | | | | | | | | |
| At June 30, 2023 | | | | | | | | |
| Corporate securities | $ | — | | $ | — | | | $ | 18,750 | | $ | (6,250) | | | $ | 18,750 | | $ | (6,250) | |
| SBA securities | 39,964 | | (2,048) | | | 50,641 | | (5,689) | | | 90,605 | | (7,737) | |
| Obligations of state and political subdivisions | — | | — | | | 2,311 | | (73) | | | 2,311 | | (73) | |
| Non-bank qualified obligations of states and political subdivisions | 38,703 | | (2,128) | | | 198,715 | | (32,315) | | | 237,418 | | (34,443) | |
| Asset-backed securities | 98,655 | | (1,170) | | | 155,911 | | (10,058) | | | 254,566 | | (11,228) | |
| Mortgage-backed securities | 284,959 | | (16,159) | | | 1,021,679 | | (200,477) | | | 1,306,638 | | (216,636) | |
| Total debt securities AFS | $ | 462,281 | | $ | (21,505) | | | $ | 1,448,007 | | $ | (254,862) | | | $ | 1,910,288 | | $ | (276,367) | |
| At September 30, 2022 | | | | | | | | |
| Corporate securities | $ | — | | $ | — | | | $ | 22,187 | | $ | (2,813) | | | $ | 22,187 | | $ | (2,813) | |
| SBA securities | 97,767 | | (7,470) | | | — | | — | | | 97,767 | | (7,470) | |
| Obligations of state and political subdivisions | 2,345 | | (125) | | | — | | — | | | 2,345 | | (125) | |
| Non-bank qualified obligations of states and political subdivisions | 195,816 | | (19,743) | | | 67,967 | | (7,228) | | | 263,783 | | (26,971) | |
| Asset-backed securities | 64,886 | | (1,838) | | | 82,904 | | (11,178) | | | 147,790 | | (13,016) | |
| Mortgage-backed securities | 816,657 | | (106,583) | | | 532,340 | | (125,872) | | | 1,348,997 | | (232,455) | |
| Total debt securities AFS | $ | 1,177,471 | | $ | (135,759) | | | $ | 705,398 | | $ | (147,091) | | | $ | 1,882,869 | | $ | (282,850) | |
| | | | | | | | |
| Debt Securities HTM | | | | | | | | |
| At June 30, 2023 | | | | | | | | |
| Non-bank qualified obligations of states and political subdivisions | $ | — | | $ | — | | | $ | 31,628 | | $ | (3,822) | | | $ | 31,628 | | $ | (3,822) | |
| Mortgage-backed securities | — | | — | | | 2,042 | | (233) | | | 2,042 | | (233) | |
| Total debt securities HTM | $ | — | | $ | — | | | $ | 33,670 | | $ | (4,055) | | | $ | 33,670 | | $ | (4,055) | |
| At September 30, 2022 | | | | | | | | |
| Non-bank qualified obligations of states and political subdivisions | $ | 3,984 | | $ | (300) | | | $ | 31,919 | | $ | (2,890) | | | $ | 35,903 | | $ | (3,190) | |
| Mortgage-backed securities | 2,268 | | (321) | | | — | | — | | | 2,268 | | (321) | |
| Total debt securities HTM | $ | 6,252 | | $ | (621) | | | $ | 31,919 | | $ | (2890) | | | $ | 38,171 | | $ | (3,511) | |
At June 30, 2023, there were 203 securities AFS in an unrealized loss position. All of the mortgage-backed securities ("MBS") in an unrealized loss position at June 30, 2023 were government guaranteed. Management assessed each investment security with unrealized losses for credit loss and determined substantially all unrealized losses on these securities were due to adverse market conditions and/or changes in interest rates versus credit loss. 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. At June 30, 2023, there was no allowance for credit losses ("ACL") for debt securities AFS.
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 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.
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | At June 30, 2023 | | At September 30, 2022 |
| Securities AFS at Fair Value | Amortized Cost | Fair
Value | | Amortized Cost | Fair
Value |
| Due in one year or less | $ | 4,784 | | $ | 4,728 | | | $ | 718 | | $ | 715 | |
| Due after one year through five years | 4,814 | | 4,400 | | | 9,921 | | 9,395 | |
| Due after five years through ten years | 86,500 | | 75,126 | | | 89,921 | | 81,819 | |
| Due after ten years | 568,240 | | 520,353 | | | 483,707 | | 441,943 | |
| 664,338 | | 604,607 | | | 584,267 | | 533,872 | |
| Mortgage-backed securities | 1,526,300 | | 1,309,664 | | | 1,581,452 | | 1,348,997 | |
| Total securities AFS, at fair value | $ | 2,190,638 | | $ | 1,914,271 | | | $ | 2,165,719 | | $ | 1,882,869 | |
| | | | | |
| Securities HTM at Fair Value | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Due after ten years | $ | 35,450 | | $ | 31,628 | | | $ | 39,093 | | $ | 35,903 | |
| 35,450 | | 31,628 | | | 39,093 | | 35,903 | |
| Mortgage-backed securities | 2,275 | | 2,042 | | | 2,589 | | 2,268 | |
| Total securities HTM, at cost | $ | 37,725 | | $ | 33,670 | | | $ | 41,682 | | $ | 38,171 | |
Federal Reserve Bank ("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 June 30, 2023 and September 30, 2022. These equity securities are 'restricted' in that they can only be owned by member banks.
Federal Home Loan Bank ("FHLB") Stock. The Company's borrowings from the FHLB are secured by 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 $11.2 million and $9.1 million at June 30, 2023 and at September 30, 2022, respectively.
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.
Equity Securities. The Company held $3.5 million at June 30, 2023 and $2.9 million at September 30, 2022 in marketable equity securities. The Company recognized $0.2 million and $3.8 million in unrealized losses on marketable equity securities during the nine months ended June 30, 2023 and 2022, respectively, which is attributable to an investee becoming publicly traded during fiscal year 2021. All other marketable equity securities and related activity were insignificant for the nine months ended June 30, 2023 and 2022. No such securities were sold during the nine months ended June 30, 2023.
Non-marketable equity securities with a readily determinable fair value totaled $8.5 million at June 30, 2023 and $7.2 million at September 30, 2022. The Company recognized $0.1 million in unrealized losses and $0.6 million in unrealized gainsduring the nine months ended June 30, 2023 and 2022, respectively. No such securities were sold during the nine months ended June 30, 2023.
Non-marketable equity securities without readily determinable fair value totaled $15.8 million at June 30, 2023 and $18.2 million at September 30, 2022. There were two such securities were sold during the nine months ended June 30, 2023.
Equity Securities Impairment. The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value. All other equity investments, including those under the equity method, are reviewed for other-than-temporary impairment on at least a quarterly basis. The Company recognized $3.2 million and no impairment for such investments for the nine months ended June 30, 2023 and 2022, respectively.
NOTE 5. LOANS AND LEASES, NET
Loans and leases consist of the following:
| | | | | | | | | | | |
| (Dollars in thousands) | June 30, 2023 | | September 30, 2022 |
| Term lending | $ | 1,253,841 | | | $ | 1,090,289 | |
| Asset based lending | 373,160 | | | 351,696 | |
| Factoring | 351,133 | | | 372,595 | |
| Lease financing | 201,996 | | | 210,692 | |
| Insurance premium finance | 666,265 | | | 479,754 | |
| SBA/USDA | 422,389 | | | 359,238 | |
| Other commercial finance | 171,954 | | | 159,409 | |
| Commercial finance | 3,440,738 | | | 3,023,673 | |
| Consumer credit products | 175,158 | | | 144,353 | |
| Other consumer finance | 24,963 | | | 25,306 | |
| Consumer finance | 200,121 | | | 169,659 | |
| Tax services | 47,194 | | | 9,098 | |
| Warehouse finance | 380,458 | | | 326,850 | |
| Total loans and leases | 4,068,511 | | | 3,529,280 | |
| Net deferred loan origination costs | 4,388 | | | 7,025 | |
| Total gross loans and leases | 4,072,899 | | | 3,536,305 | |
| Allowance for credit losses | (81,916) | | | (45,947) | |
| Total loans and leases, net | $ | 3,990,983 | | | $ | 3,490,358 | |
During the nine months ended June 30, 2023 and 2022, the Company originated $941.5 million and $769.7 million of consumer finance and SBA/USDA as held for sale, respectively.
The Company sold held for sale loans resulting in proceeds of $870.1 millionand gain on sale of $0.2 million during the nine months ended June 30, 2023. The Company sold held for sale loans resulting in proceeds of $898.4 millionand loss on sale of $3.9 million during the nine months ended June 30, 2022.
Loans purchased and sold by portfolio segment, including participation interests, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| (Dollars in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Loans Purchased | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Loans held for investment: | | | | | | | |
| Commercial finance | $ | — | | | $ | — | | | $ | — | | | $ | 3,098 | |
| | | | | | | |
| | | | | | | |
| Warehouse finance | 9,715 | | | 19,657 | | | 197,549 | | | 105,472 | |
| | | | | | | |
| Total purchases | $ | 9,715 | | | $ | 19,657 | | | $ | 197,549 | | | $ | 108,570 | |
| Loans Sold | | | | | | | |
| Loans held for sale: | | | | | | | |
| Commercial finance | $ | 11,114 | | | $ | 1,216 | | | $ | 12,263 | | | $ | 48,329 | |
| Consumer finance | 254,655 | | | 173,284 | | | 857,869 | | | 696,891 | |
| | | | | | | |
| | | | | | | |
| Community banking | — | | | — | | | — | | | 153,222 | |
| Loans held for investment: | | | | | | | |
| Commercial finance | — | | | — | | | — | | | 15,549 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Community banking | — | | | — | | | — | | | 30,235 | |
| Total sales | $ | 265,769 | | | $ | 174,500 | | | $ | 870,132 | | | $ | 944,226 | |
Leasing Portfolio. The net investment in direct financing and sales-type leases was comprised of the following: | | | | | | | | | | | |
| (Dollars in thousands) | June 30, 2023 | | September 30, 2022 |
| Carrying amount | $ | 212,275 | | | $ | 216,880 | |
| Unguaranteed residual assets | 13,152 | | | 13,037 | |
| Unamortized initial direct costs | 160 | | | 295 | |
| Unearned income | (23,431) | | | (19,225) | |
| Total net investment in direct financing and sales-type leases | $ | 202,156 | | | $ | 210,987 | |
Undiscounted future minimum lease payments receivable for direct financing and sales-type leases, and a reconciliation to the carrying amount recorded at June 30, 2023 were as follows:
| | | | | |
| (Dollars in thousands) | |
| Remaining in 2023 | $ | 23,963 | |
| 2024 | 76,232 | |
| 2025 | 46,603 | |
| 2026 | 24,781 | |
| 2027 | 15,865 | |
| Thereafter | 24,831 | |
| |
| Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases | 212,275 | |
| Third-party residual value guarantees | — | |
| Total carrying amount of direct financing and sales-type leases | $ | 212,275 | |
The Company did not record any contingent rental income from direct financing and sales-type leases in the nine months ended June 30, 2023.
The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020, with significant deterioration of macroeconomic conditions and markets into 2021. Although macroeconomic conditions and markets have improved since the beginning of 2021, other factors have been affecting the economic environment in 2022 and 2023 including geopolitical conflict, supply chain disruptions, inflation, rising interest rates, and bank failures brought on by, among other things, rising interest rates, deposit outflows and liquidity crises. While the ultimate impact of the pandemic and these other factors on the Company's loan and lease portfolio remains 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 the impact to our customers and businesses as a result of COVID-19 and other factors impacting the economy and will refine its estimate as developments occur and more information becomes available.
Activity in the allowance for credit losses and balances of loans and leases by portfolio segment was as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 |
| (Dollars in thousands) | Beginning Balance | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for credit losses: | | | | | |
| Term lending | $ | 28,415 | | $ | 250 | | $ | (2,852) | | $ | 825 | | $ | 26,638 | |
| Asset based lending | 1,081 | | 68 | | — | | 154 | | 1,303 | |
| Factoring | 5,588 | | 493 | | (140) | | 1 | | 5,942 | |
| Lease financing | 4,549 | | (355) | | (302) | | (26) | | 3,866 | |
| Insurance premium finance | 1,263 | | 1,094 | | (443) | | 158 | | 2,072 | |
| SBA/USDA | 2,640 | | 24 | | — | | — | | 2,664 | |
| Other commercial finance | 4,332 | | (253) | | — | | — | | 4,079 | |
| Commercial finance | 47,868 | | 1,321 | | (3,737) | | 1,112 | | 46,564 | |
| Consumer credit products | 1,219 | | 522 | | — | | — | | 1,741 | |
| Other consumer finance | 1,746 | | 216 | | (1,860) | | — | | 102 | |
| Consumer finance | 2,965 | | 738 | | (1,860) | | — | | 1,843 | |
| Tax services | 33,094 | | (229) | | (404) | | 671 | | 33,132 | |
| Warehouse finance | 377 | | — | | — | | — | | 377 | |
| | | | | |
| Total loans and leases | 84,304 | | 1,830 | | (6,001) | | 1,783 | | 81,916 | |
Unfunded commitments(1) | 356 | | (57) | | — | | — | | 299 | |
| Total | $ | 84,660 | | $ | 1,773 | | $ | (6,001) | | $ | 1,783 | | $ | 82,215 | |
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition. |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| (Dollars in thousands) | Beginning Balance | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for credit losses: | | | | | |
| Term lending | $ | 27,568 | | $ | 9 | | $ | (3,086) | | $ | 1,316 | | $ | 25,807 | |
| Asset based lending | 2,583 | | (1,553) | | — | | 295 | | 1,325 | |
| Factoring | 6,526 | | 533 | | (194) | | 268 | | 7,133 | |
| Lease financing | 6,471 | | (429) | | — | | 107 | | 6,149 | |
| Insurance premium finance | 1,057 | | 583 | | (230) | | 41 | | 1,451 | |
| SBA/USDA | 2,943 | | 338 | | (408) | | 25 | | 2,898 | |
| Other commercial finance | 1,197 | | (79) | | — | | — | | 1,118 | |
| Commercial finance | 48,345 | | (598) | | (3,918) | | 2,052 | | 45,881 | |
| Consumer credit products | 1,621 | | (170) | | — | | — | | 1,451 | |
| Other consumer finance | 7,388 | | (205) | | (2,428) | | 88 | | 4,843 | |
| Consumer finance | 9,009 | | (375) | | (2,428) | | 88 | | 6,294 | |
| Tax services | 30,757 | | (166) | | (7,998) | | 6 | | 22,599 | |
| Warehouse finance | 441 | | (9) | | — | | — | | 432 | |
| | | | | |
| Total loans and leases | 88,552 | | (1,148) | | (14,344) | | 2,146 | | 75,206 | |
Unfunded commitments(1) | 551 | | (154) | | — | | — | | 397 | |
| Total | $ | 89,103 | | $ | (1,302) | | $ | (14,344) | | $ | 2,146 | | $ | 75,603 | |
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition. |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2023 |
| (Dollars in thousands) | Beginning Balance | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for credit losses: | | | | | |
| Term lending | $ | 24,621 | | $ | 7,895 | | $ | (7,374) | | $ | 1,496 | | $ | 26,638 | |
| Asset based lending | 1,050 | | 2,972 | | (2,873) | | 154 | | 1,303 | |
| Factoring | 6,556 | | (311) | | (323) | | 20 | | 5,942 | |
| Lease financing | 5,902 | | (976) | | (1,315) | | 255 | | 3,866 | |
| Insurance premium finance | 1,450 | | 1,202 | | (852) | | 272 | | 2,072 | |
| SBA/USDA | 3,263 | | (625) | | — | | 26 | | 2,664 | |
| Other commercial finance | 1,310 | | 2,769 | | — | | — | | 4,079 | |
| Commercial finance | 44,152 | | 12,926 | | (12,737) | | 2,223 | | 46,564 | |
| Consumer credit products | 1,400 | | 341 | | — | | — | | 1,741 | |
| Other consumer finance | 63 | | 2,232 | | (2,193) | | — | | 102 | |
| Consumer finance | 1,463 | | 2,573 | | (2,193) | | — | | 1,843 | |
| Tax services | 5 | | 32,830 | | (2,135) | | 2,432 | | 33,132 | |
| Warehouse finance | 327 | | 50 | | — | | — | | 377 | |
| Total loans and leases | 45,947 | | 48,379 | | (17,065) | | 4,655 | | 81,916 | |
Unfunded commitments(1) | 366 | | (67) | | — | | — | | 299 | |
| Total | $ | 46,312 | | $ | 48,312 | | $ | (17,065) | | $ | 4,655 | | $ | 82,215 | |
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition. |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2022 |
| (Dollars in thousands) | Beginning Balance | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for credit losses: | | | | | |
| Term lending | $ | 29,351 | | $ | 1,104 | | $ | (6,993) | | $ | 2,345 | | $ | 25,807 | |
| Asset based lending | 1,726 | | (817) | | (16) | | 432 | | 1,325 | |
| Factoring | 3,997 | | 13,857 | | (11,057) | | 336 | | 7,133 | |
| Lease financing | 7,629 | | (1,647) | | (112) | | 279 | | 6,149 | |
| Insurance premium finance | 1,394 | | 374 | | (514) | | 197 | | 1,451 | |
| SBA/USDA | 2,978 | | 517 | | (624) | | 27 | | 2,898 | |
| Other commercial finance | 1,168 | | (50) | | — | | — | | 1,118 | |
| Commercial finance | 48,243 | | 13,338 | | (19,316) | | 3,616 | | 45,881 | |
| Consumer credit products | 1,242 | | 209 | | — | | — | | 1,451 | |
| Other consumer finance | 6,112 | | 2,513 | | (4,049) | | 267 | | 4,843 | |
| Consumer finance | 7,354 | | 2,722 | | (4,049) | | 267 | | 6,294 | |
| Tax services | 2 | | 28,093 | | (8,253) | | 2,757 | | 22,599 | |
| Warehouse finance | 420 | | 12 | | — | | — | | 432 | |
| Community banking | 12,262 | | (12,686) | | — | | 424 | | — | |
| Total loans and leases | 68,281 | | 31,479 | | (31,618) | | 7,064 | | 75,206 | |
Unfunded commitments(1) | 690 | | (293) | | — | | — | | 397 | |
| Total | $ | 68,971 | | $ | 31,186 | | $ | (31,618) | | $ | 7,064 | | $ | 75,603 | |
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition. |
Information on loans and leases that are deemed to be collateral dependent and are evaluated individually for the ACL was as follows:
| | | | | | | | | | | |
| (Dollars in thousands) | At June 30, 2023 | | At September 30, 2022 |
| Term lending | $ | 4,767 | | | $ | 2,885 | |
| Asset based lending | 14,414 | | | — | |
| Factoring | — | | | 550 | |
| Lease financing | 591 | | | 2,787 | |
| | | |
| SBA/USDA | 750 | | | 1,199 | |
| | | |
Commercial finance(1) | 20,522 | | | 7,421 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total | $ | 20,522 | | | $ | 7,421 | |
(1) For Commercial Finance, collateral dependent financial assets have collateral in the form of cash, equipment, or other business assets. |
Management has identified certain structured finance credits for alternative energy projects in which a substantial cash collateral account has been established to mitigate credit risk. Due to the nature of the transactions and significant cash collateral positions, these credits are evaluated individually. The balance of these pass rated cash collateral loans totaled $68.2 million and $120.7 million at June 30, 2023 and at September 30, 2022, respectively.
Federal regulations provide for the classification of loans and other assets such as debt and equity securities.securities considered by the Bank's primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss.” The loan classification and risk rating definitions for the Company and its wholly-owned subsidiary, MetaBank (the "Bank"), are generally as follows:
Pass-Pass - A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.
Watch-Watch - A watch asset is generally a credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures. Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention. These assets are of better quality than special mention assets.
Special Mention- SpecialMention - A special mention assets are creditsasset is a credit with potential weaknesses deserving management’s close attention and, if left uncorrected, may result in deterioration of the repayment prospects for the asset. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.
Substandard-The adverse classifications are as follows:
Substandard - A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position. Assets so classified will have well-defined weaknesses creating a distinct possibility that the Bank will sustain some loss if the weaknesses are not corrected. Loss potential does not have to exist for an asset to be classified as substandard.
Doubtful-Doubtful - A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort. Due to pending factors, the asset’s classification as loss is not yet appropriate.
Loss-Loss - A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Company'sBank’s balance sheet is no longer warranted. This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.
General allowances represent loss allowances which have been established to recognize the inherent risk
Loans and leases, or portions thereof, are generally charged off when collection of principal becomes doubtful. Typically, this is associated with lending activities, but which, unlike specific allowances,a delay or shortfall in payments of 210 days or more for commercial insurance premium finance, 120 days or more for consumer credit products and leases, and 90 days or more for commercial finance loans. Action is taken to charge off electronic return originator ("ERO") loans if such loans have not been allocated to particular problem assets. When assets are classified as “loss,”collected by the Company is required either to establish a specific allowance for losses equal to 100%end of that portionJune and refund advance loans if such loans have not been collected by the end of the asset so classified or to charge-off such amount. The Company's determinations as to the classification of its assetscalendar year. Nonaccrual loans and the amount of its valuation allowancestroubled debt restructurings are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.generally individually evaluated for expected credit losses.
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 allowable Allowance for LoanCredit Losses.
The Company has various portfolios of consumer finance and tax services loans that present unique risks that are statistically managed. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in its evaluation of the appropriateness of the ACL 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 $200.1 million and $47.2 million at June 30, 2023, respectively, and $169.7 million and $9.1 million at September 30, 2022, respectively. The amortized cost basis of loans at December 31, 2017 and September 30, 2017leases 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 |
| At June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior |
| Term lending | | | | | | | | |
| Pass | $ | 313,587 | | $ | 201,918 | | $ | 119,763 | | $ | 82,834 | | $ | 18,380 | | $ | 203,059 | | $ | — | | $ | 939,541 | |
| Watch | 47,005 | | 50,336 | | 61,125 | | 11,832 | | 6,964 | | 14,399 | | — | | 191,661 | |
| Special mention | 1,174 | | 12,080 | | 11,369 | | 1,383 | | 1,106 | | 1,753 | | — | | 28,865 | |
| Substandard | 2,715 | | 34,238 | | 19,320 | | 25,326 | | 4,485 | | 2,135 | | — | | 88,219 | |
| Doubtful | 103 | | 1,934 | | 1,110 | | 931 | | 235 | | 1,242 | | — | | 5,555 | |
| Total | 364,584 | | 300,506 | | 212,687 | | 122,306 | | 31,170 | | 222,588 | | — | | 1,253,841 | |
| Asset based lending | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 163,401 | | 163,401 | |
| Watch | — | | — | | — | | — | | — | | — | | 163,215 | | 163,215 | |
| Special mention | — | | — | | — | | — | | — | | — | | 23,264 | | 23,264 | |
| Substandard | — | | — | | — | | — | | — | | — | | 15,748 | | 15,748 | |
| Doubtful | — | | — | | — | | — | | — | | — | | 7,532 | | 7,532 | |
| Total | — | | — | | — | | — | | — | | — | | 373,160 | | 373,160 | |
| Factoring | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 257,636 | | 257,636 | |
| Watch | — | | — | | — | | — | | — | | — | | 71,351 | | 71,351 | |
| Special mention | — | | — | | — | | — | | — | | — | | 11,875 | | 11,875 | |
| Substandard | — | | — | | — | | — | | — | | — | | 10,271 | | 10,271 | |
| | | | | | | | |
| Total | — | | — | | — | | — | | — | | — | | 351,133 | | 351,133 | |
| Lease financing | | | | | | | | |
| Pass | 8,249 | | 18,748 | | 21,365 | | 34,127 | | 2,091 | | 50,807 | | — | | 135,387 | |
| Watch | 190 | | 10,301 | | 11,617 | | 3,370 | | 2,222 | | 477 | | — | | 28,177 | |
| Special mention | — | | — | | 1,374 | | 602 | | 281 | | — | | — | | 2,257 | |
| Substandard | — | | 8,185 | | 8,168 | | 3,960 | | 6,269 | | 9,278 | | — | | 35,860 | |
| Doubtful | — | | — | | 81 | | 100 | | — | | 134 | | — | | 315 | |
| Total | 8,439 | | 37,234 | | 42,605 | | 42,159 | | 10,863 | | 60,696 | | — | | 201,996 | |
| Insurance premium finance | | | | | | | | |
| Pass | 655,755 | | 8,822 | | 9 | | — | | — | | — | | — | | 664,586 | |
| Watch | 374 | | 239 | | — | | — | | — | | — | | — | | 613 | |
| Special mention | 115 | | 74 | | — | | — | | — | | — | | — | | 189 | |
| Substandard | 55 | | 429 | | — | | — | | — | | — | | — | | 484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Doubtful | 80 | | 313 | | — | | — | | — | | — | | — | | 393 | |
| Total | 656,379 | | 9,877 | | 9 | | — | | — | | — | | — | | 666,265 | |
| SBA/USDA | | | | | | | | |
| Pass | 91,797 | | 198,975 | | 28,116 | | 45,070 | | 9,288 | | 18,745 | | — | | 391,991 | |
| Watch | — | | — | | 326 | | 53 | | 358 | | 2,391 | | — | | 3,128 | |
| Special mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | 252 | | 1,680 | | 1,156 | | 7,185 | | 8,303 | | 8,694 | | — | | 27,270 | |
| | | | | | | | |
| Total | 92,049 | | 200,655 | | 29,598 | | 52,308 | | 17,949 | | 29,830 | | — | | 422,389 | |
| Other commercial finance | | | | | | | | |
| Pass | 3,425 | | 18,899 | | 32,908 | | 1,094 | | 10,212 | | 73,785 | | — | | 140,323 | |
| Watch | 1,740 | | — | | — | | — | | — | | — | | — | | 1,740 | |
| Special mention | — | | — | | 18,000 | | — | | — | | — | | — | | 18,000 | |
| Substandard | 2,789 | | 464 | | 8,379 | | — | | — | | 259 | | — | | 11,891 | |
| | | | | | | | |
| Total | 7,954 | | 19,363 | | 59,287 | | 1,094 | | 10,212 | | 74,044 | | — | | 171,954 | |
| Warehouse finance | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 380,458 | | 380,458 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total | — | | — | | — | | — | | — | | — | | 380,458 | | 380,458 | |
| Total loans and leases | | | | | | | | |
| Pass | 1,072,813 | | 447,362 | | 202,161 | | 163,125 | | 39,971 | | 346,396 | | 801,495 | | 3,073,323 | |
| Watch | 49,309 | | 60,876 | | 73,068 | | 15,255 | | 9,544 | | 17,267 | | 234,566 | | 459,885 | |
| Special mention | 1,289 | | 12,154 | | 30,743 | | 1,985 | | 1,387 | | 1,753 | | 35,139 | | 84,450 | |
| Substandard | 5,811 | | 44,996 | | 37,023 | | 36,471 | | 19,057 | | 20,366 | | 26,019 | | 189,743 | |
| Doubtful | 183 | | 2,247 | | 1,191 | | 1,031 | | 235 | | 1,376 | | 7,532 | | 13,795 | |
| Total | $ | 1,129,405 | | $ | 567,635 | | $ | 344,186 | | $ | 217,867 | | $ | 70,194 | | $ | 387,158 | | $ | 1,104,751 | | $ | 3,821,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis |
| (Dollars in thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total |
| At September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior |
| Term lending | | | | | | | | |
| Pass | $ | 246,627 | | $ | 240,018 | | $ | 105,170 | | $ | 60,417 | | $ | 89,072 | | $ | 61,229 | | $ | — | | $ | 802,533 | |
| Watch | 45,539 | | 24,318 | | 45,052 | | 11,698 | | 21,077 | | 9,799 | | — | | 157,483 | |
| Special mention | 9,500 | | 24,885 | | 14,300 | | 2,861 | | 619 | | 242 | | — | | 52,407 | |
| Substandard | 10,627 | | 16,694 | | 12,248 | | 23,266 | | 10,457 | | 2,255 | | — | | 75,547 | |
| Doubtful | 175 | | 407 | | 469 | | 872 | | 204 | | 192 | | — | | 2,319 | |
| Total | 312,468 | | 306,322 | | 177,239 | | 99,114 | | 121,429 | | 73,717 | | — | | 1,090,289 | |
| Asset based lending | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 154,494 | | 154,494 | |
| Watch | — | | — | | — | | — | | — | | — | | 162,990 | | 162,990 | |
| Special mention | — | | — | | — | | — | | — | | — | | 13,770 | | 13,770 | |
| Substandard | — | | — | | — | | — | | — | | — | | 20,442 | | 20,442 | |
| | | | | | | | |
| Total | — | | — | | — | | — | | — | | — | | 351,696 | | 351,696 | |
| Factoring | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 254,883 | | 254,883 | |
| Watch | — | | — | | — | | — | | — | | — | | 86,219 | | 86,219 | |
| Special mention | — | | — | | — | | — | | — | | — | | 9,174 | | 9,174 | |
| Substandard | — | | — | | — | | — | | — | | — | | 22,319 | | 22,319 | |
| | | | | | | | |
| Total | — | | — | | — | | — | | — | | — | | 372,595 | | 372,595 | |
| Lease financing | | | | | | | | |
| Pass | 7,407 | | 38,818 | | 31,408 | | 26,552 | | 12,361 | | 823 | | — | | 117,369 | |
| Watch | 8,799 | | 17,098 | | 10,284 | | 6,655 | | 2,899 | | 151 | | — | | 45,886 | |
| Special mention | 151 | | 6,151 | | 2,644 | | 481 | | 2,876 | | 2,811 | | — | | 15,114 | |
| Substandard | 825 | | 9,486 | | 11,819 | | 7,273 | | 1,245 | | — | | — | | 30,648 | |
| Doubtful | 144 | | 163 | | 1,280 | | 88 | | — | | — | | — | | 1,675 | |
| Total | 17,326 | | 71,716 | | 57,435 | | 41,049 | | 19,381 | | 3,785 | | — | | 210,692 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance premium finance | | | | | | | | |
| Pass | 478,504 | | 307 | | 8 | | — | | — | | — | | — | | 478,819 | |
| Watch | 539 | | 7 | | — | | — | | — | | — | | — | | 546 | |
| Special mention | 169 | | 40 | | — | | — | | — | | — | | — | | 209 | |
| Substandard | 106 | | 46 | | — | | — | | — | | — | | — | | 152 | |
| Doubtful | 14 | | 14 | | — | | — | | — | | — | | — | | 28 | |
| Total | 479,332 | | 414 | | 8 | | — | | — | | — | | — | | 479,754 | |
| SBA/USDA | | | | | | | | |
| Pass | 54,512 | | 111,907 | | 40,474 | | 56,538 | | 28,874 | | 24,305 | | — | | 316,610 | |
| Watch | — | | 13,836 | | 1,266 | | 702 | | — | | 710 | | — | | 16,514 | |
| Special mention | — | | 211 | | — | | 869 | | — | | — | | — | | 1,080 | |
| Substandard | 4,149 | | 10,968 | | 4,278 | | — | | 1,094 | | 4,545 | | — | | 25,034 | |
| | | | | | | | |
| Total | 58,661 | | 136,922 | | 46,018 | | 58,109 | | 29,968 | | 29,560 | | — | | 359,238 | |
| Other commercial finance | | | | | | | | |
| Pass | 5,886 | | 13,607 | | 26,040 | | 20,458 | | 23,098 | | 40,782 | | — | | 129,871 | |
| | | | | | | | |
| | | | | | | | |
| Substandard | — | | 9,538 | | — | | — | | — | | 20,000 | | — | | 29,538 | |
| | | | | | | | |
| Total | 5,886 | | 23,145 | | 26,040 | | 20,458 | | 23,098 | | 60,782 | | — | | 159,409 | |
| Warehouse finance | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 294,350 | | 294,350 | |
| | | | | | | | |
| Special mention | — | | — | | — | | — | | — | | — | | 32,500 | | 32,500 | |
| | | | | | | | |
| | | | | | | | |
| Total | — | | — | | — | | — | | — | | — | | 326,850 | | 326,850 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total loans and leases | | | | | | | | |
| Pass | 792,936 | | 404,657 | | 203,100 | | 163,965 | | 153,405 | | 127,139 | | 703,727 | | 2,548,929 | |
| Watch | 54,877 | | 55,259 | | 56,602 | | 19,055 | | 23,976 | | 10,660 | | 249,209 | | 469,638 | |
| Special mention | 9,820 | | 31,287 | | 16,944 | | 4,211 | | 3,495 | | 3,053 | | 55,444 | | 124,254 | |
| Substandard | 15,707 | | 46,732 | | 28,345 | | 30,539 | | 12,796 | | 26,800 | | 42,761 | | 203,680 | |
| Doubtful | 333 | | 584 | | 1,749 | | 960 | | 204 | | 192 | | — | | 4,022 | |
| Total | $ | 873,673 | | $ | 538,519 | | $ | 306,740 | | $ | 218,730 | | $ | 193,876 | | $ | 167,844 | | $ | 1,051,141 | | $ | 3,350,523 | |
Past due loans and leases were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Accruing and Nonaccruing Loans and Leases | | Nonperforming Loans and Leases |
| At June 30, 2023 | 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 | Nonaccrual Balance | Total |
| Loans held for sale | $ | 10 | | $ | — | | $ | — | | $ | 10 | | $ | 87,341 | | $ | 87,351 | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | |
| Term lending | 30,464 | | 3,423 | | 8,074 | | 41,961 | | 1,211,880 | | 1,253,841 | | | 1,862 | | 13,207 | | 15,069 | |
| Asset based lending | — | | — | | 218 | | 218 | | 372,942 | | 373,160 | | | 218 | | 14,407 | | 14,625 | |
| Factoring | — | | — | | — | | — | | 351,133 | | 351,133 | | | — | | 364 | | 364 | |
| Lease financing | 2,945 | | 729 | | 1,940 | | 5,614 | | 196,382 | | 201,996 | | | 1,627 | | 1,494 | | 3,121 | |
| Insurance premium finance | 1,884 | | 874 | | 2,394 | | 5,152 | | 661,113 | | 666,265 | | | 2,394 | | — | | 2,394 | |
| SBA/USDA | 51 | | 908 | | 1,002 | | 1,961 | | 420,428 | | 422,389 | | | 349 | | 698 | | 1,047 | |
| Other commercial finance | — | | — | | 92 | | 92 | | 171,862 | | 171,954 | | | 92 | | — | | 92 | |
| Commercial finance | 35,344 | | 5,934 | | 13,720 | | 54,998 | | 3,385,740 | | 3,440,738 | | | 6,542 | | 30,170 | | 36,712 | |
| Consumer credit products | 2,512 | | 2,030 | | 2,058 | | 6,600 | | 168,558 | | 175,158 | | | 2,058 | | — | | 2,058 | |
| Other consumer finance | 26 | | 20 | | 29 | | 75 | | 24,888 | | 24,963 | | | 29 | | — | | 29 | |
| Consumer finance | 2,538 | | 2,050 | | 2,087 | | 6,675 | | 193,446 | | 200,121 | | | 2,087 | | — | | 2,087 | |
| Tax services | — | | 47,194 | | — | | 47,194 | | — | | 47,194 | | | — | | — | | — | |
| Warehouse finance | — | | — | | — | | — | | 380,458 | | 380,458 | | | — | | — | | — | |
| Total loans and leases held for investment | 37,882 | | 55,178 | | 15,807 | | 108,867 | | 3,959,644 | | 4,068,511 | | | 8,629 | | 30,170 | | 38,799 | |
| Total loans and leases | $ | 37,892 | | $ | 55,178 | | $ | 15,807 | | $ | 108,877 | | $ | 4,046,985 | | $ | 4,155,862 | | | $ | 8,629 | | $ | 30,170 | | $ | 38,799 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | 1-4 Family
Real Estate | | Commercial and
Multi-Family
Real Estate | | Agricultural
Real Estate | | Consumer | | Commercial
Operating | | Agricultural
Operating | | CML Insurance
Premium
Finance | | Total |
| | (Dollars in Thousands) |
| Pass | $ | 203,035 |
| | $ | 643,393 |
| | $ | 28,794 |
| | $ | 274,783 |
| | $ | 56,245 |
| | $ | 14,304 |
| | $ | 235,671 |
| | $ | 1,456,225 |
|
| Watch | 608 |
| | 10,145 |
| | — |
| | 102 |
| | 271 |
| | 13 |
| | — |
| | 11,139 |
|
| Special Mention | 245 |
| | 199 |
| | 2,939 |
| | — |
| | — |
| | — |
| | — |
| | 3,383 |
|
| Substandard | 79 |
| | 292 |
| | 29,570 |
| | 96 |
| | — |
| | 10,379 |
| | — |
| | 40,416 |
|
| Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | $ | 203,967 |
| | $ | 654,029 |
| | $ | 61,303 |
| | $ | 274,981 |
| | $ | 56,516 |
| | $ | 24,696 |
| | $ | 235,671 |
| | $ | 1,511,163 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Accruing and Nonaccruing Loans and Leases | | Nonperforming Loans and Leases |
| At September 30, 2022 | 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 | Nonaccrual Balance | Total |
| Loans held for sale | $ | — | | $ | — | | $ | — | | $ | — | | $ | 21,071 | | $ | 21,071 | | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | |
| Term lending | 14,066 | | 2,576 | | 4,458 | | 21,100 | | 1,069,189 | | 1,090,289 | | | 2,035 | | 7,576 | | 9,611 | |
| Asset based lending | — | | — | | 68 | | 68 | | 351,628 | | 351,696 | | | 39 | | 29 | | 68 | |
| Factoring | — | | — | | — | | — | | 372,595 | | 372,595 | | | — | | 569 | | 569 | |
| Lease financing | 8,265 | | 2,253 | | 1,714 | | 12,232 | | 198,460 | | 210,692 | | | 440 | | 3,750 | | 4,190 | |
| Insurance premium finance | 2,550 | | 1,379 | | 1,628 | | 5,557 | | 474,197 | | 479,754 | | | 1,628 | | — | | 1,628 | |
| SBA/USDA | — | | — | | — | | — | | 359,238 | | 359,238 | | | — | | 1,451 | | 1,451 | |
| Other commercial finance | — | | — | | — | | — | | 159,409 | | 159,409 | | | — | | — | | — | |
| Commercial finance | 24,881 | | 6,208 | | 7,868 | | 38,957 | | 2,984,716 | | 3,023,673 | | | 4,142 | | 13,375 | | 17,517 | |
| Consumer credit products | 3,209 | | 2,558 | | 2,669 | | 8,436 | | 135,917 | | 144,353 | | | 2,669 | | — | | 2,669 | |
| Other consumer finance | 113 | | 51 | | 124 | | 288 | | 25,018 | | 25,306 | | | 124 | | — | | 124 | |
| Consumer finance | 3,322 | | 2,609 | | 2,793 | | 8,724 | | 160,935 | | 169,659 | | | 2,793 | | — | | 2,793 | |
| Tax services | — | | — | | 8,873 | | 8,873 | | 225 | | 9,098 | | | 8,873 | | — | | 8,873 | |
| Warehouse finance | — | | — | | — | | — | | 326,850 | | 326,850 | | | — | | — | | — | |
| | | | | | | | | | |
| Total loans and leases held for investment | 28,203 | | 8,817 | | 19,534 | | 56,554 | | 3,472,726 | | 3,529,280 | | | 15,808 | | 13,375 | | 29,183 | |
| Total loans and leases | $ | 28,203 | | $ | 8,817 | | $ | 19,534 | | $ | 56,554 | | $ | 3,493,797 | | $ | 3,550,351 | | | $ | 15,808 | | $ | 13,375 | | $ | 29,183 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | 1-4 Family
Real Estate | | Commercial and
Multi-Family
Real Estate | | Agricultural
Real Estate | | Consumer | | Commercial
Operating | | Agricultural
Operating | | Premium
Finance | | Total |
| | (Dollars in Thousands) |
| Pass | $ | 195,838 |
| | $ | 574,730 |
| | $ | 27,376 |
| | $ | 163,004 |
| | $ | 35,759 |
| | $ | 18,394 |
| | $ | 250,459 |
| | $ | 1,265,560 |
|
| Watch | 525 |
| | 10,200 |
| | 2,006 |
| | — |
| | — |
| | 4,541 |
| | — |
| | 17,272 |
|
| Special Mention | 247 |
| | 201 |
| | 2,939 |
| | — |
| | — |
| | — |
| | — |
| | 3,387 |
|
| Substandard | 96 |
| | 379 |
| | 29,479 |
| | — |
| | — |
| | 10,659 |
| | — |
| | 40,613 |
|
| Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | $ | 196,706 |
| | $ | 585,510 |
| | $ | 61,800 |
| | $ | 163,004 |
| | $ | 35,759 |
| | $ | 33,594 |
| | $ | 250,459 |
| | $ | 1,326,832 |
|
One-to-Four Family Residential Mortgage Lending. One-to-four family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate and adjustable rate mortgage (“ARM”) loans for both permanent structures and those under construction. The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.
The Company originates one-to-four family residential mortgage loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the security property or the contract price. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan‑to‑value level. Residential loans generally do not include prepayment penalties. Due to consumer demand, the Company offers fixed-rate mortgage loans with terms up to 30 years, most of which conform to secondary market standards, such as Fannie Mae, Ginnie Mae, and Freddie Mac standards. The Company typically holds all fixed-rate mortgageNonaccrual loans and does not engage in secondary market sales. Interest rates charged on these fixed-rate loans are competitively priced according to market conditions.
The Company also currently offers five- and ten-year ARM loans. These loans have a fixed-rate for the stated period and, thereafter, adjust annually. These loans generally provide for an annual capleases by year of up to 200 basis points and a lifetime cap of 600 basis points over the initial rate. As a consequence of using an initial fixed-rate and caps, the interest rates on these loans may not be as rate sensitive as the Company’s cost of funds. The Company’s ARMs do not permit negative amortization of principal and are not convertible into fixed-rate loans. The Company’s delinquency experience on its ARM loans has generally been similar to its experience on fixed-rate residential loans. The current low mortgage interest rate environment makes ARM loans relatively unattractive and very few are currently being originated.
In underwriting one-to-four family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors of the Company. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company has not engaged in sub-prime residential mortgage originations.
Commercial and Multi-Family Real Estate Lending. The Company engages in commercial and multi-family real estate lending in its primary market area and surrounding areas and, in order to supplement its loan portfolio, has purchased whole loan and participation interests in loans from other financial institutions. The purchased loans and loan participation interests are generally secured by properties primarily located in the Midwest.
The Company’s commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings and hotels. Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the security property, and are typically secured by guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.
Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
Agricultural Lending. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer and other farm-related products. Agricultural operating loans are originated at either an adjustable or fixed rate of interest for up to a one year term or, in the case of livestock, upon sale. Such loans provide for payments of principal and interest at least annually or a lump sum payment upon maturity if the original term is less than one year. Loans secured by agricultural machinery are generally originated as fixed-rate loans with terms of up to seven years.
Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally, such loans provide for a fixed rate of interest for the first five to ten years, after which the loan will balloon or the interest rate will adjust annually. These loans generally amortize over a period of 20 to 25 years. Fixed-rate agricultural real estate loans generally have terms up to ten years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
Agricultural lending affords the Company the opportunity to earn yields higher than those obtainable on one-to-four family residential lending, but involves a greater degree of risk than one-to-four family residential mortgage loans because of the typically larger loan amount. In addition, payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by many factors outside the control of the borrower.
Weather presents one of the greatest risks as hail, drought, floods, or other conditions can severely limit crop yields and thus impair loan repayments and the value of the underlying collateral. This risk can be reduced by the farmer with a variety of insurance coverages which can help to ensure loan repayment. Government support programs and the Company generally require that farmers procure crop insurance coverage. Grain and livestock prices also present a risk as prices may decline prior to sale, resulting in a failure to cover production costs. These risks may be reduced by the farmer with the use of futures contracts or options to mitigate price risk. The Company frequently requires borrowers to use futures contracts or options to reduce price risk and help ensure loan repayment. Another risk is the uncertainty of government programs and other regulations. During periods of low commodity prices, the income from government programs can be a significant source of cash for the borrower to make loan payments, and if these programs are discontinued or significantly changed, cash flow problems or defaults could result. Finally, many farms are dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.
Consumer Lending. The Bank originates a variety of secured consumer loans, including home equity, home improvement, automobile and boat loans and loans secured by savings deposits. In addition, the Bank offers other secured and unsecured consumer loans and currently originates most of its community banking consumer loans in its primary market areas and surrounding areas. In addition, the Bank’s consumer lending portfolio includes two purchased student loan portfolios, the most recent purchased on October 11, 2017, along with consumer lending products offered through its payments segment.
The Bank's community banking consumer loan portfolio consists primarily of home equity loans and lines of credit. Substantially all of the Bank's home equity loans and lines of credit are secured by second mortgages on principal residences. The Bank will lend amounts which, togetherwith all prior liens, may be up to 90% of the appraised value of the property securing the loan. Home equity loans and lines of credit generally have maximum terms of five years.
The Bank primarily originates automobile loans on a direct basis to the borrower, as opposed to indirect loans, which are made when the Bank purchases loan contracts, often at a discount, from automobile dealers which have extended credit to their customers. The Bank’s automobile loans typically are originated at fixed interest rates with terms of up to 60 months for new and used vehicles. Loans secured by automobiles are generally originated for up to 80% of the N.A.D.A. book value of the automobile securing the loan.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison of the value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
On October 11, 2017, the Company completed the purchase of a $73.0 million, seasoned, floating rate, private student loan portfolio. All loans are indexed to one-month LIBOR. The portfolio is serviced by ReliaMax Lending Services LLC and insured by ReliaMax Surety Company. This portfolio purchase builds on the Company's existing student loan platform.
The Bank’s student loan portfolio that was purchased during the first quarter of fiscal year 2017 is a seasoned portfolio that is also serviced by ReliaMax Lending Services, LLC and insured by ReliaMax Surety Company. All loans in this portfolio are floating rate and indexed to the three-month LIBOR plus various margins.
Through its Payments segment, the Bank strives to offer consumers innovative payment products, including credit products. Most credit products have fallen into the category of portfolio lending. The Payments segment, including Specialty Consumer Services ("SCS"), continues its development of new alternative portfolio lending products primarily to serve its customer base and to provide innovative lending solutions to the unbanked and under-banked segment.
The Payments segment also provides short-term consumer refund advance loans. Taxpayers are underwritten to determine eligibility for the unsecured loans, which are, by design, interest and fee-free to the consumer. Due to the nature of consumer advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. Generally, when the refund advance loan becomes delinquent for 180 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
Commercial Operating Lending. The Company also originates commercial operating loans. Most of the Company’s commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The Company also extends short-term commercial Electronic Return Originator ("ERO") advance loans through its Payments segment as described in more detail below.
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year. The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. ERO loans are not collateralized. The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s credit analysis. As described further below, such loans are believed to carry higher credit risk than more traditional lending activities.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company’s commercial operating loans are usually, but not always, secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Through its Payments segment, the Company also provides short-term ERO advance loans on a nation-wide basis. These loans are typically utilized to purchase tax preparation software and to prepare tax offices for the upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, when the ERO advance loan becomes delinquent for 120 days or more, or when collection of principal becomes doubtful, the Company will charge off the loan balance.
Commercial Insurance Premium Finance Lending. Through its AFS/IBEX division, the Bank provides short-term and primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk otherwise known as commercial insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk. The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation.
Commercial insurance premium financing is the business of extending credit to a policyholder to pay for insurance premiums when the insurance carrier requires payment in full at inception of coverage. Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to ten months on average. The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest.
Due to the nature of collateral for commercial insurance premium finance receivables, it customarily takes 60-210 days to convert the collateral into cash. In the event of default, AFS/IBEX, by statute and contract, has the power to cancel the insurance policy and establish a first position lien on the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer has typically been sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Generally, when a loan becomes delinquent for 210 days or more, or when collection of principal or interest becomes doubtful, the Company will charge off the loan balance and any remaining interest and fees after applying any collection from the insurance company.
Past due loans at December 31, 2017 and September 30, 2017origination were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis |
| (Dollars in thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total | Nonaccrual with No ACL |
| At June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior |
| Term lending | $ | 103 | | $ | 3,819 | | $ | 2,245 | | $ | 2,017 | | $ | 3,380 | | $ | 1,643 | | $ | — | | $ | 13,207 | | $ | — | |
| Asset based lending | — | | — | | — | | — | | — | | — | | 14,407 | | 14,407 | | 14,407 | |
| Factoring | — | | — | | — | | — | | — | | — | | 364 | | 364 | | — | |
| Lease financing | — | | 269 | | 596 | | — | | — | | 629 | | — | | 1,494 | | 591 | |
| | | | | | | | | |
| SBA/USDA | — | | 401 | | 12 | | 32 | | — | | 253 | | — | | 698 | | 401 | |
| | | | | | | | | |
| Commercial finance | 103 | | 4,489 | | 2,853 | | 2,049 | | 3,380 | | 2,525 | | 14,771 | | 30,170 | | 15,399 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total nonaccrual loans and leases | $ | 103 | | $ | 4,489 | | $ | 2,853 | | $ | 2,049 | | $ | 3,380 | | $ | 2,525 | | $ | 14,771 | | $ | 30,170 | | $ | 15,399 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis | |
| (Dollars in thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total | Nonaccrual with No ACL |
| At September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior |
| Term lending | $ | 251 | | $ | 1,110 | | $ | 1,964 | | $ | 989 | | $ | 3,096 | | $ | 166 | | $ | — | | $ | 7,576 | | $ | 2,885 | |
| Asset based lending | — | | — | | — | | — | | — | | — | | 29 | | 29 | | — | |
| Factoring | — | | — | | — | | — | | — | | — | | 569 | | 569 | | 550 | |
| Lease financing | 977 | | 310 | | 2,442 | | 13 | | 8 | | — | | — | | 3,750 | | — | |
| | | | | | | | | |
| SBA/USDA | — | | — | | 1,199 | | — | | — | | 252 | | — | | 1,451 | | 1,199 | |
| | | | | | | | | |
| Commercial finance | 1,228 | | 1,420 | | 5,605 | | 1,002 | | 3,104 | | 418 | | 598 | | 13,375 | | 4,634 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total nonaccrual loans and leases | $ | 1,228 | | $ | 1,420 | | $ | 5,605 | | $ | 1,002 | | $ | 3,104 | | $ | 418 | | $ | 598 | | $ | 13,375 | | $ | 4,634 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accruing and Non-accruing Loans | | Nonperforming Loans |
| December 31, 2017 | 30-59 Days
Past Due | | 60-89 Days
Past Due | | > 89 Days Past Due | | Total Past
Due | | Current | | Total Loans
Receivable | | > 89 Days Past Due and Accruing | | Non-accrual balance | | Total |
| | (Dollars in Thousands) |
| 1-4 Family Real Estate | $ | 106 |
| | $ | — |
| | $ | 234 |
| | $ | 340 |
| | $ | 203,627 |
| | 203,967 |
| | 234 |
| | $ | — |
| | $ | 234 |
|
| Commercial and Multi-Family Real Estate | — |
| | 284 |
| | — |
| | 284 |
| | 653,745 |
| | 654,029 |
| | — |
| | 284 |
| | 284 |
|
| Agricultural Real Estate | — |
| | — |
| | 27,818 |
| | 27,818 |
| | 33,485 |
| | 61,303 |
| | 27,818 |
| | — |
| | 27,818 |
|
| Consumer | 4,192 |
| | 2,015 |
| | 1,624 |
| | 7,831 |
| | 267,150 |
| | 274,981 |
| | 1,624 |
| | — |
| | 1,624 |
|
| Commercial Operating | — |
| | — |
| | — |
| | — |
| | 56,516 |
| | 56,516 |
| | — |
| | — |
| | — |
|
| Agricultural Operating | — |
| | — |
| | — |
| | — |
| | 24,696 |
| | 24,696 |
| | — |
| | — |
| | — |
|
| CML Insurance Premium Finance | 1,594 |
| | 592 |
| | 3,194 |
| | 5,380 |
| | 230,291 |
| | 235,671 |
| | 3,194 |
| | — |
| | 3,194 |
|
| Total | $ | 5,892 |
| | $ | 2,891 |
| | $ | 32,870 |
| | $ | 41,653 |
| | $ | 1,469,510 |
| | 1,511,163 |
| | 32,870 |
| | $ | 284 |
| | $ | 33,154 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accruing and Non-accruing Loans | | Nonperforming Loans |
| September 30, 2017 | 30-59 Days
Past Due | | 60-89 Days
Past Due | | > 89 Days Past Due | | Total Past
Due | | Current | | Total Loans
Receivable | | > 89 Days Past Due and Accruing | | Non-accrual balance | | Total |
| | (Dollars in Thousands) |
| 1-4 Family Real Estate | $ | 370 |
| | $ | 79 |
| | $ | — |
| | $ | 449 |
| | $ | 196,257 |
| | $ | 196,706 |
| | — |
| | $ | — |
| | $ | — |
|
| Commercial and Multi-Family Real Estate | 295 |
| | — |
| | 390 |
| | 685 |
| | 584,825 |
| | 585,510 |
| | — |
| | 685 |
| | 685 |
|
| Agricultural Real Estate | — |
| | — |
| | 34,198 |
| | 34,198 |
| | 27,602 |
| | 61,800 |
| | 34,198 |
| | — |
| | 34,198 |
|
| Consumer | 2,512 |
| | 558 |
| | 1,406 |
| | 4,476 |
| | 158,528 |
| | 163,004 |
| | 1,406 |
| | — |
| | 1,406 |
|
| Commercial Operating | — |
| | — |
| | — |
| | — |
| | 35,759 |
| | 35,759 |
| | — |
| | — |
| | — |
|
| Agricultural Operating | — |
| | — |
| | 97 |
| | 97 |
| | 33,497 |
| | 33,594 |
| | 97 |
| | — |
| | 97 |
|
| CML Insurance Premium Finance | 1,509 |
| | 2,442 |
| | 1,205 |
| | 5,156 |
| | 245,303 |
| | 250,459 |
| | 1,205 |
| | — |
| | 1,205 |
|
| Total | $ | 4,686 |
| | $ | 3,079 |
| | $ | 37,296 |
| | $ | 45,061 |
| | $ | 1,281,771 |
| | $ | 1,326,832 |
| | 36,906 |
| | $ | 685 |
| | $ | 37,591 |
|
When analysis of borrower operating resultsLoans and financial condition indicatesleases that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 210 days or more for commercial insurance premium finance loans, 180 days or more for refund advance loans, 120 days or more for ERO advance loans and 90 days or more for other loan categories. Asdelinquent and accruing by year of December 31, 2017, thereorigination were no commercial insurance premium financeas follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis |
| (Dollars in thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total |
| At June 30, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior |
| Term lending | $ | 128 | | $ | 917 | | $ | 658 | | $ | 107 | | $ | 52 | | $ | — | | $ | — | | $ | 1,862 | |
| Asset based lending | — | | — | | — | | — | | — | | — | | 218 | | 218 | |
| | | | | | | | |
| Lease financing | — | | 479 | | 969 | | 152 | | 20 | | 7 | | — | | 1,627 | |
| Insurance premium finance | 1,149 | | 1,241 | | 4 | | — | | — | | — | | — | | 2,394 | |
| SBA/USDA | — | | 349 | | — | | — | | — | | — | | — | | 349 | |
| Other commercial finance | — | | — | | — | | — | | — | | 92 | | — | | 92 | |
| Commercial finance | 1,277 | | 2,986 | | 1,631 | | 259 | | 72 | | 99 | | 218 | | 6,542 | |
| Consumer credit products | 335 | | 1,239 | | 415 | | 50 | | 19 | | — | | — | | 2,058 | |
| Other consumer finance | — | | — | | — | | — | | — | | — | | 29 | | 29 | |
| Consumer finance | 335 | | 1,239 | | 415 | | 50 | | 19 | | — | | 29 | | 2,087 | |
| | | | | | | | |
| | | | | | | | |
| Total 90 days or more delinquent and accruing | $ | 1,612 | | $ | 4,225 | | $ | 2,046 | | $ | 309 | | $ | 91 | | $ | 99 | | $ | 247 | | $ | 8,629 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis |
| (Dollars in thousands) | Term Loans and Leases by Origination Year | Revolving Loans and Leases | Total |
| At September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior |
| Term lending | $ | 207 | | $ | 720 | | $ | 716 | | $ | 130 | | $ | 70 | | $ | 192 | | $ | — | | $ | 2,035 | |
| Asset based lending | — | | — | | — | | — | | — | | — | | 39 | | 39 | |
| | | | | | | | |
| Lease financing | 8 | | 158 | | 98 | | 131 | | 45 | | — | | — | | 440 | |
| Insurance premium finance | 1,513 | | 110 | | 5 | | — | | — | | — | | — | | 1,628 | |
| | | | | | | | |
| | | | | | | | |
| Commercial finance | 1,728 | | 988 | | 819 | | 261 | | 115 | | 192 | | 39 | | 4,142 | |
| Consumer credit products | 2,123 | | 481 | | 42 | | 23 | | — | | — | | — | | 2,669 | |
| Other consumer finance | — | | 124 | | — | | — | | — | | — | | — | | 124 | |
| Consumer finance | 2,123 | | 605 | | 42 | | 23 | | — | | — | | — | | 2,793 | |
| Tax services | 8,873 | | — | | — | | — | | — | | — | | — | | 8,873 | |
| | | | | | | | |
| Total 90 days or more delinquent and accruing | $ | 12,724 | | $ | 1,593 | | $ | 861 | | $ | 284 | | $ | 115 | | $ | 192 | | $ | 39 | | $ | 15,808 | |
Certain loans greater than 210and 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) consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due.
Total loans past due decreased $3.4 million to $41.7 million at December 31, 2017 from $45.1 million at September 30, 2017. This decrease was due to a $4.4 million decrease in loans greater than 90 days past due. The primary driver of the decrease in loans greater than 90 days past due included the payoff of a large nonperforming agricultural loan relationship during the first quarter of fiscal 2018.
Impaired loans at December 31, 2017 and September 30, 2017 were as follows:
|
| | | | | | | | | | | |
| | Recorded
Balance | | Unpaid Principal
Balance | | Specific
Allowance |
| December 31, 2017 | (Dollars in Thousands) |
| Loans without a specific valuation allowance | | | | | |
| 1-4 Family Real Estate | $ | 95 |
| | $ | 95 |
| | $ | — |
|
| Commercial and Multi-Family Real Estate | 707 |
| | 707 |
| | — |
|
| Consumer | 61 |
| | 61 |
| | — |
|
| Agricultural Operating | 1,052 |
| | 1,052 |
| | — |
|
| Total | $ | 1,915 |
| | $ | 1,915 |
| | $ | — |
|
|
| | | | | | | | | | | |
| | Recorded
Balance | | Unpaid Principal
Balance | | Specific
Allowance |
| September 30, 2017 | (Dollars in Thousands) |
| Loans without a specific valuation allowance | | | | | |
| 1-4 Family Real Estate | $ | 72 |
| | $ | 72 |
| | $ | — |
|
| Commercial and Multi-Family Real Estate | 1,109 |
| | 1,109 |
| | — |
|
| Total | $ | 1,181 |
| | $ | 1,181 |
| | $ | — |
|
The following table provides the average recorded investment in impairednonaccrual loans and leases:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| (Dollars in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Term lending | $ | 12,637 | | | $ | 11,114 | | | $ | 10,397 | | | $ | 11,908 | |
| Asset based lending | 15,792 | | | 3,500 | | | 8,452 | | | 4,502 | |
| Factoring | 545 | | | 1,903 | | | 592 | | | 7,980 | |
| Lease financing | 2,675 | | | 3,529 | | | 3,308 | | | 3,194 | |
| | | | | | | |
| SBA/USDA | 1,261 | | | 1,776 | | | 1,353 | | | 1,152 | |
| | | | | | | |
| Commercial finance | 32,910 | | | 21,822 | | | 24,102 | | | 28,736 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total loans and leases | $ | 32,910 | | | $ | 21,822 | | | $ | 24,102 | | | $ | 28,736 | |
The recognized interest income on the Company's nonaccrual loans and leases for the three month periodsand nine months ended December 31, 2017June 30, 2023 and 2016.2022 was not significant.
|
| | | | | | | |
| | Three Months Ended December 31, |
| | 2017 | | 2016 |
| | Average
Recorded
Investment | | Average
Recorded
Investment |
| | (Dollars in Thousands) |
| 1-4 Family Real Estate | $ | 80 |
| | $ | 172 |
|
| Commercial and Multi-Family Real Estate | 975 |
| | 432 |
|
| Consumer | 20 |
| | — |
|
| Commercial Operating | — |
| | 168 |
|
| Agricultural Operating | 351 |
| | — |
|
| Total | $ | 1,426 |
| | $ | 772 |
|
The Company’s troubled debt restructurings (“TDR”("TDRs") typically involve forgiving a portion of interest or principal on existing loans, or making loans at a rate materially less than current market rates.Thererates, or extending the term of the loan. No loans were $1.1 million of loans modified in a TDR during the three month periodmonths ended December 31, 2017June 30, 2023. There were $0.2 million of commercial finance loans and no$0.5 million of consumer finance loans that were modified in a TDR during the three month periodmonths ended December 31, 2016. Additionally,June 30, 2022, all of which were modified to extend the term of the loan.
During the nine months ended June 30, 2023, there were no loans that were modified in a TDR. There were $10.4 million of commercial finance loans and $0.7 million of consumer finance loans that were modified in a TDR during the nine months ended June 30, 2022, all of which were modified to extend the term of the loan.
During the three months ended June 30, 2023, there was an immaterial amount of commercial finance loans that were modified in a TDR within the previous 12 months and for which there was a payment default during the three month periods ended December 31, 2017 or 2016 that had been modified during the 12-month period prior to the default.
NOTE 3. ALLOWANCE FOR LOAN LOSSES
At December 31, 2017, the Company’s allowance for loan losses increased to $8.9 million from $7.5 million at September 30, 2017. This increase was primarily due to the additional provision expense related to tax advance loans. During the three months ended December 31, 2017,June 30, 2022, the Company recorded a provision for loan losseshad $1.4 million of $1.1 million compared to $0.8 million for the same period of the prior year. The Company hadcommercial finance loans and $0.3 million of net recoveriesconsumer finance loans that were modified in a TDR with the previous 12 months and for which there was a payment default.
During the threenine months ended December 31, 2017, compared to $0.1June 30, 2023, the Company had $0.4 million of commercial finance loans that were modified in a TDR within the previous 12 months and for which there was a payment default. During the nine months ended June 30, 2022, the Company had $3.9 million of commercial finance loans and $1.1 million of consumer finance 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 credit losses were insignificant during the threenine months ended December 31, 2016.June 30, 2023 and June 30, 2022.
The allowance for loan losses is established through the provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an appropriate loan loss allowance.
Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan losses. The current economic environment continues to show signs of improvement in the Bank’s markets. The Bank’s average loss rates over the past three years for community banking loans were relatively low compared to peers, but was offset with a higher agricultural loss rate in fiscal year 2016 driven by the charge off of one relationship. Although the Bank’s four market areas have indirectly benefited from a stable agricultural market, the market has become slightly stressed as commodity prices have generally remained lower than a few years ago. Management believes the low commodity prices and adverse weather conditions have the potential to negatively impact the economies of our agricultural markets. The improving economic conditions have also kept the loss rates on the national lending loans as well as the tax service loans relatively low.
Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio and other factors, the current level of the allowance for loan losses at December 31, 2017, reflects an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods. In addition, the Company’s determination of the allowance for loan losses is subject to review by the OCC, which can require the establishment of additional general or specific allowances.
Real estate properties acquired through foreclosure are recorded at the lesser of fair value or the recorded investment. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management and, if the value declines, a specific provision for losses on such property is established by a charge to operations.
NOTE 4.6. EARNINGS PER COMMON SHARE ("EPS")
Earnings per share is computed after deducting dividends. 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.calculation under the two-class method. Basic earnings per shareEPS 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 shareEPS is calculated using the more dilutive of the treasury stock method or the two-class method. Diluted EPS 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 afternonvested restricted stock, where applicable. Diluted EPS under the two-class method also considers the allocation of earnings to the participating securities. Antidilutive optionssecurities are disregarded in the 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 June 30, | | Nine Months Ended June 30, |
| (Dollars in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Basic income per common share: | | | | | | | |
| Net income attributable to Pathward Financial, Inc. | $ | 45,096 | | | $ | 22,391 | | | $ | 127,709 | | | $ | 132,966 | |
| Dividends and undistributed earnings allocated to participating securities | (690) | | | (377) | | | (1,920) | | | (2,166) | |
| Basic net earnings available to common stockholders | 44,406 | | | 22,014 | | | 125,789 | | | 130,800 | |
| Undistributed earnings allocated to nonvested restricted stockholders | 670 | | | 352 | | | 1,858 | | | 2,093 | |
| Reallocation of undistributed earnings to nonvested restricted stockholders | (667) | | | (352) | | | (1,852) | | | (2,092) | |
| | | | | | | |
| | | | | | | |
| Diluted net earnings available to common stockholders | $ | 44,409 | | | $ | 22,014 | | | $ | 125,795 | | | $ | 130,801 | |
| | | | | | | |
| Total weighted-average basic common shares outstanding | 26,346,693 | | | 28,868,136 | | | 27,152,773 | | | 29,444,979 | |
Effect of dilutive securities(1) | | | | | | | |
| | | | | | | |
| Performance share units | 100,339 | | | — | | | 86,028 | | | 9,607 | |
| | | | | | | |
| Total effect of dilutive securities | 100,339 | | | — | | | 86,028 | | | 9,607 | |
| Total weighted-average diluted common shares outstanding | 26,447,032 | | | 28,868,136 | | | 27,238,801 | | | 29,454,586 | |
| | | | | | | |
| Net earnings per common share: | | | | | | | |
| Basic earnings per common share | $ | 1.69 | | | $ | 0.76 | | | $ | 4.63 | | | $ | 4.44 | |
Diluted earnings per common share(2) | $ | 1.68 | | | $ | 0.76 | | | $ | 4.62 | | | $ | 4.44 | |
(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, 2017June 30, 2023 and 20162022, respectively, were 409,666 and 493,800 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive. Excluded from the computation of diluted earnings per share for the nine months ended June 30, 2023 and 2022, respectively, were 414,539 and 487,538 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive.
NOTE 7. RENTAL EQUIPMENT, NET
Rental equipment consists of the following:
| | | | | | | | | | | |
| (Dollars in thousands) | June 30, 2023 | | September 30, 2022 |
| Computers and IT networking equipment | $ | 25,681 | | | $ | 21,669 | |
| Motor vehicles and other | 123,374 | | | 107,648 | |
| Other furniture and equipment | 49,214 | | | 34,254 | |
| Solar panels and equipment | 137,809 | | | 133,765 | |
| Total | 336,078 | | | 297,336 | |
| | | |
| Accumulated depreciation | (113,122) | | | (94,355) | |
| Unamortized initial direct costs | 1,256 | | | 1,390 | |
| Net book value | $ | 224,212 | | | $ | 204,371 | |
Future minimum lease payments expected to be received for operating leases at June 30, 2023 were as follows:
| | | | | |
| (Dollars in thousands) | |
| Remaining in 2023 | $ | 11,844 | |
| 2024 | 40,640 | |
| 2025 | 33,086 | |
| 2026 | 23,247 | |
| 2027 | 15,506 | |
| Thereafter | 17,484 | |
| Total | $ | 141,807 | |
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The Company held a total of $309.5 million of goodwill at June 30, 2023. The recorded goodwill is presented below.
|
| | | | | | | |
| Three Months Ended December 31, | 2017 | | 2016 |
| (Dollars in Thousands, Except Share and Per Share Data) | | | |
| Basic income per common share: | | | |
| Net income attributable to Meta Financial Group, Inc. | $ | 4,670 |
| | $ | 1,244 |
|
| Weighted average common shares outstanding | 9,656,778 |
| | 8,938,339 |
|
| Basic income per common share | 0.48 |
| | 0.14 |
|
| | | | |
| Diluted income per common share: | | | |
| Net income attributable to Meta Financial Group, Inc. | $ | 4,670 |
| | $ | 1,244 |
|
| Weighted average common shares outstanding | 9,656,778 |
| | 8,938,339 |
|
| Outstanding options - based upon the two-class method | 56,063 |
| | 63,061 |
|
| Weighted average diluted common shares outstanding | 9,712,841 |
| | 9,001,400 |
|
| Diluted income per common share | 0.48 |
| | 0.14 |
|
NOTE 5. SECURITIES
During the first quarter of fiscal 2018, the Company early adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Due to the early adoption of the ASU, the Company transferred $204.7 million of investment securities and $101.3 million of MBS from HTM to AFS during the first quarter of fiscal 2018. This change allows for enhanced balance sheet management and provides the opportunity for more liquidity, should it be needed.
The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale and held to maturity securities at December 31, 2017 and September 30, 2017 are presented below.
|
| | | | | | | | | | | | | | | |
| Available For Sale | | | | | | | |
| At December 31, 2017 | AMORTIZED
COST |
| | GROSS
UNREALIZED
GAINS
|
| | GROSS
UNREALIZED
(LOSSES)
|
| | FAIR
VALUE |
|
| | (Dollars in Thousands) |
| Debt securities | | | | | | | |
| Small business administration securities | 56,602 |
| | 349 |
| | (3 | ) | | 56,948 |
|
| Obligations of states and political subdivisions | 14,513 |
| | 123 |
| | (26 | ) | | 14,610 |
|
| Non-bank qualified obligations of states and political subdivisions | 1,212,661 |
| | 16,079 |
| | (5,710 | ) | | 1,223,030 |
|
| Asset-backed securities | 93,486 |
| | 2,337 |
| | — |
| | 95,823 |
|
| Mortgage-backed securities | 606,338 |
| | 198 |
| | (6,424 | ) | | 600,112 |
|
| Total debt securities | 1,983,600 |
| | 19,086 |
| | (12,163 | ) | | 1,990,523 |
|
| Common equities and mutual funds | 1,298 |
| | 532 |
| | (1 | ) | | 1,829 |
|
| Total available for sale securities | $ | 1,984,898 |
| | $ | 19,618 |
| | $ | (12,164 | ) | | $ | 1,992,352 |
|
|
| | | | | | | | | | | | | | | |
| At September 30, 2017 | AMORTIZED
COST |
| | GROSS
UNREALIZED
GAINS |
| | GROSS
UNREALIZED
(LOSSES) |
| | FAIR
VALUE |
|
| | (Dollars in Thousands) |
| Debt securities | | | | | | | |
| Small business administration securities | 57,046 |
| | 825 |
| | — |
| | 57,871 |
|
| Non-bank qualified obligations of states and political subdivisions | 938,883 |
| | 14,983 |
| | (3,037 | ) | | 950,829 |
|
| Asset-backed securities | 94,451 |
| | 2,381 |
| | — |
| | 96,832 |
|
| Mortgage-backed securities | 588,918 |
| | 1,259 |
| | (3,723 | ) | | 586,454 |
|
| Total debt securities | 1,679,298 |
| | 19,448 |
| | (6,760 | ) | | 1,691,986 |
|
| Common equities and mutual funds | 1,009 |
| | 436 |
| | — |
| | 1,445 |
|
| Total available for sale securities | $ | 1,680,307 |
| | $ | 19,884 |
| | $ | (6,760 | ) | | $ | 1,693,431 |
|
|
| | | | | | | | | | | | | | | |
| Held to Maturity | | | | | | | |
| At December 31, 2017 | AMORTIZED
COST |
| | GROSS
UNREALIZED
GAINS
|
| | GROSS
UNREALIZED
(LOSSES)
|
| | FAIR
VALUE |
|
| | (Dollars in Thousands) |
| Debt securities | | | | | | | |
| Obligations of states and political subdivisions | $ | 4,341 |
| | $ | 26 |
| | $ | (25 | ) | | $ | 4,342 |
|
| Non-bank qualified obligations of states and political subdivisions | 230,683 |
| | 336 |
| | (3,537 | ) | | 227,482 |
|
| Mortgage-backed securities | 8,468 |
| | — |
| | (148 | ) | | 8,320 |
|
| Total held to maturity securities | $ | 243,492 |
| | $ | 362 |
| | $ | (3,710 | ) | | $ | 240,144 |
|
|
| | | | | | | | | | | | | | | |
| At September 30, 2017 | AMORTIZED
COST |
| | GROSS
UNREALIZED
GAINS |
| | GROSS
UNREALIZED
(LOSSES) |
| | FAIR
VALUE |
|
| | (Dollars in Thousands) |
| Debt securities | | | | | | | |
| Obligations of states and political subdivisions | $ | 19,247 |
| | $ | 157 |
| | $ | (36 | ) | | $ | 19,368 |
|
| Non-bank qualified obligations of states and political subdivisions | 430,593 |
| | 4,744 |
| | (2,976 | ) | | 432,361 |
|
| Mortgage-backed securities | 113,689 |
| | — |
| | (1,233 | ) | | 112,456 |
|
| Total held to maturity securities | $ | 563,529 |
| | $ | 4,901 |
| | $ | (4,245 | ) | | $ | 564,185 |
|
Management has implemented a process to identify securities with potential credit impairment that are other-than-temporary. This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook of the security, monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.
For all securities considered temporarily impaired, the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity. The Company believes it will collect all principal and interest due on all investments with amortized cost in excess of fair value and considered only temporarily impaired.
GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: Available for Sale (“AFS”), Held to Maturity (“HTM”) or trading. AFS securities are carried at fair value on the consolidated statements of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment. The Company did not have any trading securities at December 31, 2017 or September 30, 2017.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and September 30, 2017, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Available For Sale | LESS THAN 12 MONTHS | | OVER 12 MONTHS | | TOTAL |
| At December 31, 2017 | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) |
| | (Dollars in Thousands) |
| Debt securities | | | | | | | | | | | |
| Small business administration securities | $ | 14,236 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 14,236 |
| | $ | (3 | ) |
| Obligations of states and political subdivisions | 3,139 |
| | (26 | ) | | — |
| | — |
| | 3,139 |
| | (26 | ) |
| Non-bank qualified obligations of states and political subdivisions | 553,626 |
| | (4,945 | ) | | 16,045 |
| | (765 | ) | | 569,671 |
| | (5,710 | ) |
| Mortgage-backed securities | 234,672 |
| | (1,275 | ) | | 296,252 |
| | (5,149 | ) | | 530,924 |
| | (6,424 | ) |
| Total debt securities | 805,673 |
| | (6,249 | ) | | 312,297 |
| | (5,914 | ) | | 1,117,970 |
| | (12,163 | ) |
| Common equities and mutual funds | 1,829 |
| | (1 | ) | | — |
| | — |
| | 1,829 |
| | (1 | ) |
| Total available for sale securities | $ | 807,502 |
| | $ | (6,250 | ) | | $ | 312,297 |
| | $ | (5,914 | ) | | $ | 1,119,799 |
| | $ | (12,164 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | LESS THAN 12 MONTHS | | OVER 12 MONTHS | | TOTAL |
| At September 30, 2017 | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) |
| | (Dollars in Thousands) |
| Debt securities | | | | | | | | | | | |
| Non-bank qualified obligations of states and political subdivisions | 280,900 |
| | (2,887 | ) | | 5,853 |
| | (150 | ) | | 286,753 |
| | (3,037 | ) |
| Mortgage-backed securities | 237,897 |
| | (1,625 | ) | | 100,287 |
| | (2,098 | ) | | 338,184 |
| | (3,723 | ) |
| Total debt securities | 518,797 |
| | (4,512 | ) | | 106,140 |
| | (2,248 | ) | | 624,937 |
| | (6,760 | ) |
| Total available for sale securities | $ | 518,797 |
| | $ | (4,512 | ) | | $ | 106,140 |
| | $ | (2,248 | ) | | $ | 624,937 |
| | $ | (6,760 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Held To Maturity | LESS THAN 12 MONTHS | | OVER 12 MONTHS | | TOTAL |
| At December 31, 2017 | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) |
| | (Dollars in Thousands) |
| Debt securities | | | | | | | | | | | |
| Obligations of states and political subdivisions | $ | 1,261 |
| | $ | (3 | ) | | $ | 2,147 |
| | $ | (22 | ) | | $ | 3,408 |
| | $ | (25 | ) |
| Non-bank qualified obligations of states and political subdivisions | 114,999 |
| | (1,789 | ) | | 80,813 |
| | (1,748 | ) | | 195,812 |
| | (3,537 | ) |
| Mortgage-backed securities | — |
| | — |
| | 8,320 |
| | (148 | ) | | 8,320 |
| | (148 | ) |
| Total held to maturity securities | $ | 116,260 |
| | $ | (1,792 | ) | | $ | 91,280 |
| | $ | (1,918 | ) | | $ | 207,540 |
| | $ | (3,710 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | LESS THAN 12 MONTHS | | OVER 12 MONTHS | | TOTAL |
| At September 30, 2017 | Fair
Value | | Unrealized
(Losses) | | Fair
Value | | Unrealized
(Losses) | | Fair Value | | Unrealized
(Losses) |
| | (Dollars in Thousands) |
| Debt securities | | | | | | | | | | | |
| Obligations of states and political subdivisions | $ | 1,364 |
| | $ | (6 | ) | | $ | 4,089 |
| | $ | (30 | ) | | $ | 5,453 |
| | $ | (36 | ) |
| Non-bank qualified obligations of states and political subdivisions | 202,018 |
| | (2,783 | ) | | 6,206 |
| | (193 | ) | | 208,224 |
| | (2,976 | ) |
| Mortgage-backed securities | 112,456 |
| | (1,233 | ) | | — |
| | — |
| | 112,456 |
| | (1,233 | ) |
| Total held to maturity securities | $ | 315,838 |
| | $ | (4,022 | ) | | $ | 10,295 |
| | $ | (223 | ) | | $ | 326,133 |
| | $ | (4,245 | ) |
At December 31, 2017, the investment portfolio included securities with current unrealized losses which have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, and because the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis, which may occur at maturity, no other-than-temporary impairment was recorded at December 31, 2017.
The amortized cost and fair value of debt securities by contractual maturity as of the dates set forth below are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary. The expected maturities of certain housing related municipal securities, Small Business Administration and asset-backed securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
|
| | | | | | | |
| Available For Sale | AMORTIZED
COST |
| | FAIR
VALUE |
|
| |
| At December 31, 2017 | (Dollars in Thousands) |
| | | | |
| Due in one year or less | $ | 100 |
| | $ | 100 |
|
| Due after one year through five years | 55,485 |
| | 56,375 |
|
| Due after five years through ten years | 452,422 |
| | 462,903 |
|
| Due after ten years | 869,255 |
| | 871,033 |
|
| | 1,377,262 |
| | 1,390,411 |
|
| Mortgage-backed securities | 606,338 |
| | 600,112 |
|
| Common equities and mutual funds | 1,298 |
| | 1,829 |
|
| Total available for sale securities | $ | 1,984,898 |
| | $ | 1,992,352 |
|
|
| | | | | | | |
| | AMORTIZED
COST |
| | FAIR
VALUE |
|
| At September 30, 2017 | (Dollars in Thousands) |
| | | | |
| Due in one year or less | $ | — |
| | $ | — |
|
| Due after one year through five years | 36,586 |
| | 37,674 |
|
| Due after five years through ten years | 347,831 |
| | 358,198 |
|
| Due after ten years | 705,963 |
| | 709,660 |
|
| | 1,090,380 |
| | 1,105,532 |
|
| Mortgage-backed securities | 588,918 |
| | 586,454 |
|
| Common equities and mutual funds | 1,009 |
| | 1,445 |
|
| Total available for sale securities | $ | 1,680,307 |
| | $ | 1,693,431 |
|
|
| | | | | | | |
| Held To Maturity | AMORTIZED
COST |
| | FAIR
VALUE |
|
| |
| At December 31, 2017 | (Dollars in Thousands) |
| | | | |
| Due in one year or less | $ | 2,674 |
| | $ | 2,662 |
|
| Due after one year through five years | 11,864 |
| | 11,895 |
|
| Due after five years through ten years | 27,919 |
| | 28,206 |
|
| Due after ten years | 192,567 |
| | 189,061 |
|
| | 235,024 |
| | 231,824 |
|
| Mortgage-backed securities | 8,468 |
| | 8,320 |
|
| Total held to maturity securities | $ | 243,492 |
| | $ | 240,144 |
|
|
| | | | | | | |
| | AMORTIZED
COST |
| | FAIR
VALUE |
|
| At September 30, 2017 | (Dollars in Thousands) |
| Due in one year or less | $ | 1,483 |
| | $ | 1,480 |
|
| Due after one year through five years | 17,926 |
| | 18,160 |
|
| Due after five years through ten years | 144,996 |
| | 147,832 |
|
| Due after ten years | 285,435 |
| | 284,257 |
|
| | 449,840 |
| | 451,729 |
|
| Mortgage-backed securities | 113,689 |
| | 112,456 |
|
| Total held to maturity securities | $ | 563,529 |
| | $ | 564,185 |
|
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes various commitments to extend credit which are not reflected in the accompanying consolidated financial statements.
At December 31, 2017 and September 30, 2017, unfunded loan commitments approximated $349.5 million and $233.2 million, respectively, excluding undisbursed portions of loans in process. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract.
The Company had no commitments to purchase or sell securities at December 31, 2017 or September 30, 2017.
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 and loans in process expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Legal Proceedings
The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank, BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County, Texas. The Plaintiff’s Second Amended Original Petition and Application for Temporary Restraining Order and Temporary Injunction adds both MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager and processor for both Inter National Bank ("INB") and MetaBank. According to the Petition, NetSpend has informed INB that the depository accounts at INB for the NetSpend program supposedly contained $10.5 million less than they should. INB alleges that NetSpend has breached its fiduciary duty by making affirmative misrepresentations to INB about the safety and stability of the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing procedures. To the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have been unjustly enriched. The Bank is vigorously contesting this matter. In January 2014, NetSpend was granted summary judgment in this matter which is under appeal. Because the theory of liability against both NetSpend and the Bank is the same, the Bank views the NetSpend summary judgment as a positive in support of our position. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.
The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that after all of the programs were wound down, there were two accounts with a positive balance to which they are entitled. The Bank’s position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is entitled is $4,001,025. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.
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 7. STOCK COMPENSATION
The Company maintains the amended and restated Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company. Awards are granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.
Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of the grant. The exercise price of options or fair value of non-vested (restricted) shares granted under the Company’s incentive plan is equal to the fair market value of the underlying stock at the grant date. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.
The following tables show the activity of options and nonvested (restricted) shares granted, exercised, or forfeited under the 2002 Omnibus Incentive Plan for the three months ended December 31, 2017:
|
| | | | | | | | | | | | | |
| | Number
of
Shares |
| | Weighted
Average
Exercise
Price |
| | Weighted
Average
Remaining
Contractual
Term (Yrs) |
| | Aggregate
Intrinsic
Value |
|
| | (Dollars in Thousands, Except Per Share Data) |
| Options outstanding, September 30, 2017 | 75,757 |
| | $ | 22.62 |
| | 2.28 |
| | $ | 4,225 |
|
| Granted | — |
| | — |
| | — |
| | — |
|
| Exercised | — |
| | — |
| | — |
| | — |
|
| Forfeited or expired | — |
| | — |
| | — |
| | — |
|
| Options outstanding, December 31, 2017 | 75,757 |
| | $ | 22.62 |
| | 2.03 |
| | $ | 5,305 |
|
| | | | | | | | |
| Options exercisable, December 31, 2017 | 75,757 |
| | $ | 22.62 |
| | 2.03 |
| | $ | 5,305 |
|
|
| | | | | | |
| | Number
of
Shares |
| | Weighted
Average
Fair Value
at Grant |
|
| (Dollars in Thousands, Except Per Share Data) |
| Nonvested (restricted) shares outstanding, September 30, 2017 | 304,526 |
| | $ | 86.96 |
|
| Granted | 42,181 |
| | 85.03 |
|
| Vested | (61,161 | ) | | 83.55 |
|
| Forfeited or expired | — |
| | — |
|
| Nonvested (restricted) shares outstanding, December 31, 2017 | 285,546 |
| | $ | 87.40 |
|
During the first and second quarters of fiscal 2017, stock awards were granted to the Company's three highest paid executive officers in connection with their signing of employment agreements with the Company. These stock awards vest over eight years.
At December 31, 2017, stock-based compensation expense not yet recognized in income totaled $17.2 million, which is expected to be recognized over a weighted average remaining period of 3.68 years.
NOTE 8. SEGMENT INFORMATION
An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.
The Company reports its results of operations through the following three business segments: Payments, Banking, and Corporate Services/Other. Certain shared services, including the investment portfolio, wholesale deposits and borrowings, are included in Corporate Services/Other. National Lending and Community Banking are reported in the Banking segment. MPS, Refund Advantage, EPS Financial ("EPS"), SCS, and other tax businesses are reported in the Payments segment.
The Company reclassified goodwill, intangibles, and related amortization expenses during fiscal year 2017 from the
Corporate Services / Other segment to Payments and Banking based on how annual impairment testing is performed. Prior period amounts have also been reclassified to conform to the current year presentation.
The following tables present segment data for the Company for the three months ended December 31, 2017 and 2016, respectively.
|
| | | | | | | | | | | | | | | |
| | Payments | | Banking | | Corporate
Services/Other | | Total |
| Three Months Ended December 31, 2017 | | | | | | | |
| Interest income | $ | 4,669 |
| | $ | 16,478 |
| | $ | 9,710 |
| | $ | 30,857 |
|
| Interest expense | — |
| | 881 |
| | 3,780 |
| | 4,661 |
|
| Net interest income | 4,669 |
| | 15,597 |
| | 5,930 |
| | 26,196 |
|
| Provision for loan losses | 1,017 |
| | 51 |
| | — |
| | 1,068 |
|
| Non-interest income | 28,101 |
| | 1,485 |
| | (318 | ) | | 29,268 |
|
| Non-interest expense | 26,934 |
| | 6,568 |
| | 10,540 |
| | 44,042 |
|
| Income (loss) before income tax expense (benefit) | 4,819 |
| | 10,463 |
| | (4,928 | ) | | 10,354 |
|
| | | | | | | | |
| Total goodwill | 87,145 |
| | 11,578 |
| | — |
| | 98,723 |
|
| Total assets | 380,442 |
| | 1,478,693 |
| | 3,558,828 |
| | 5,417,963 |
|
| Total deposits | 2,768,736 |
| | 236,494 |
| | 508,415 |
| | 3,513,645 |
|
|
| | | | | | | | | | | | | | | |
| | Payments | | Banking | | Corporate
Services/Other | | Total |
| Three Months Ended December 31, 2016 | | | | | | | |
| Interest income | $ | 2,912 |
| | $ | 10,754 |
| | $ | 8,909 |
| | $ | 22,575 |
|
| Interest expense | — |
| | 544 |
| | 2,198 |
| | 2,742 |
|
| Net interest income | 2,912 |
| | 10,210 |
| | 6,711 |
| | 19,833 |
|
| Provision for loan losses | 331 |
| | 512 |
| | — |
| | 843 |
|
| Non-interest income | 19,024 |
| | 1,072 |
| | (747 | ) | | 19,349 |
|
| Non-interest expense | 22,080 |
| | 5,845 |
| | 8,828 |
| | 36,753 |
|
| Income (loss) before income tax expense (benefit) | (475 | ) | | 4,925 |
| | (2,864 | ) | | 1,586 |
|
| | | | | | | | |
| Total goodwill | 87,320 |
| | 11,578 |
| | — |
| | 98,898 |
|
| Total assets | 239,804 |
| | 1,118,429 |
| | 2,855,096 |
| | 4,213,329 |
|
| Total deposits | 2,435,530 |
| | 225,182 |
| | 1,002,425 |
| | 3,663,137 |
|
The changes in the carrying amount of the Company’s intangible assets were as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Trademark(1) | Non-Compete | Customer Relationships(2) | All Others(3) | Total |
| Intangible Assets | | | | | |
| At September 30, 2022 | $ | 8,605 | | $ | — | | $ | 12,395 | | $ | 4,691 | | $ | 25,691 | |
| | | | | |
| Amortization during the period | (868) | | — | | (2,595) | | (398) | | (3,861) | |
| | | | | |
| At June 30, 2023 | $ | 7,737 | | $ | — | | $ | 9,800 | | $ | 4,293 | | $ | 21,830 | |
| | | | | |
| Gross carrying amount | $ | 14,624 | | $ | 2,481 | | $ | 82,088 | | $ | 9,940 | | $ | 109,133 | |
| Accumulated amortization | (6,887) | | (2,481) | | (61,370) | | (5,429) | | (76,167) | |
| Accumulated impairment | — | | — | | (10,918) | | (218) | | (11,136) | |
| At June 30, 2023 | $ | 7,737 | | $ | — | | $ | 9,800 | | $ | 4,293 | | $ | 21,830 | |
| | | | | |
| At September 30, 2021 | $ | 9,823 | | $ | 40 | | $ | 17,868 | | $ | 5,417 | | $ | 33,148 | |
| Acquisitions during the period | — | | — | | — | | 1 | | 1 | |
| Amortization during the period | (871) | | (40) | | (3,884) | | (393) | | (5,188) | |
| Write-offs during the period | — | | — | | (670) | | (203) | | (873) | |
| At June 30, 2022 | $ | 8,952 | | $ | — | | $ | 13,314 | | $ | 4,822 | | $ | 27,088 | |
| | | | | |
| Gross carrying amount | $ | 14,624 | | $ | 2,481 | | $ | 82,088 | | $ | 9,940 | | $ | 109,133 | |
| Accumulated amortization | (5,672) | | (2,481) | | (57,856) | | (4,900) | | (70,909) | |
| Accumulated impairment | — | | — | | (10,918) | | (218) | | (11,136) | |
| At June 30, 2022 | $ | 8,952 | | $ | — | | $ | 13,314 | | $ | 4,822 | | $ | 27,088 | |
(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 10-30 years. Amortized using the accelerated method.
(3) Book amortization period of 3-20 years. Amortized using the straight line method.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in the remaining three months of fiscal 2023 and subsequent fiscal years at June 30, 2023 was as follows:
| | | | | |
| (Dollars in thousands) | |
| Remaining in 2023 | $ | 1,082 | |
| 2024 | 4,123 | |
| 2025 | 3,561 | |
| 2026 | 3,215 | |
| 2027 | 2,569 | |
| Thereafter | 7,280 | |
| Total anticipated intangible amortization | $ | 21,830 | |
There were no impairments to intangible assets during the nine months ended June 30, 2023 and 2022. Intangible impairment expense is recorded within the impairment expense line of the Condensed Consolidated Statements of Operations.
NOTE 9. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES
Operating lease right-of-use ("ROU") assets, included in other assets, were $27.7 million and $31.0 million at June 30, 2023 and 2022, respectively.
Operating lease liabilities, included in accrued expenses and other liabilities, were $29.6 million and $32.9 million at June 30, 2023 and 2022, respectively.
Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities at June 30, 2023 were as follows:
| | | | | |
| (Dollars in thousands) | |
| Remaining in 2023 | $ | 1,091 | |
| 2024 | 3,913 | |
| 2025 | 3,718 | |
| 2026 | 3,195 | |
| 2027 | 3,092 | |
| Thereafter | 18,639 | |
| Total undiscounted future minimum lease payments | 33,648 | |
| Discount | (4,003) | |
| Total operating lease liabilities | $ | 29,645 | |
The weighted-average discount rate and remaining lease term for operating leases at June 30, 2023 were as follows:
| | | | | |
| Weighted-average discount rate | 2.37 | % |
| Weighted-average remaining lease term (years) | | | | | 9.82 |
The components of total lease costs for operating leases were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| (Dollars in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Lease expense | $ | 978 | | | $ | 1,119 | | | $ | 2,974 | | | $ | 3,375 | |
| Short-term and variable lease cost | 22 | | | 58 | | | 106 | | | 133 | |
| ROU asset impairment | — | | | 670 | | | — | | | 670 | |
| Sublease income | (368) | | | (375) | | | (1,040) | | | (906) | |
| Total lease cost for operating leases | $ | 632 | | | $ | 1,472 | | | $ | 2,040 | | | $ | 3,272 | |
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
This ASU requires organizations to replace the incurred loss impairment methodology with a methodology reflecting expected credit losses with considerations for a broader range of reasonable and supportable information to substantiate credit loss estimates. This ASU is effective for annual reporting periods beginning after December 15, 2019. The Company is currently undertaking a data analysis and is taking measures so that its systems capture data applicable to the standard. In addition, the Company is undergoing a readiness assessment with an external consultant that began in the first quarter of fiscal 2018.
ASU No. 2016-04, Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
This ASU requires organizations to derecognize the deposit liabilities for unredeemed prepaid stored-value products (i.e. – breakage) consistent with breakage guidance in Topic 606, Revenue from Contracts with Customers. This ASU is effective for annual reporting periods beginning after December 15, 2017, and the Company expects the impact to the consolidated financial statements to be minimal.
ASU No. 2016-02, Leases (Topic 842): Amendments to the Leases Analysis
This ASU requires organizations to recognize lease assets and lease liabilities on the balance sheet, along with disclosing key information about leasing arrangements. This update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and the Company has finalized its initial assessment of the ASU and expects that the standard will be immaterial to the consolidated financial statements with the Company's current leases.
ASU No. 2014-09, Revenue Recognition – Revenue from Contracts with Customers (Topic 606)
This ASU provides guidance on when to recognize revenue from contracts with customers. The objective of this ASU is to eliminate diversity in practice related to this topic and to provide guidance that would streamline and enhance revenue recognition requirements. The ASU defines five steps to recognize revenue, including identify the contract with a customer, identify the performance obligations in the contract, determine a transaction price, allocate the transaction price to the performance obligations and then recognize the revenue when or as the entity satisfies a performance obligation. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and the Company is currently assessing all income streams, including different prepaid card programs so as to ascertain how breakage will be recognized under the standard.
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
This ASU requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. This update was effective for annual and interim periods in fiscal years beginning after December 15, 2016, and did not have an impact on the consolidated financial statements.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU addresses eight classification issues related to the statement of cash flows including: debt prepayment or debt extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and the Company expects the impact to the consolidated financial statements to be minimal.
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
This ASU requires entities to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments in this update require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and is not expected to have a material impact on the consolidated financial statements.
ASU 2017-12, Receivables - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
This ASU targets improving the accounting treatment for hedging activities and provides more flexibility in defining what can be hedged, while reducing earnings volatility due to ineffective hedges, and minimizing documentation requirements. The ASU also offers the ability to reclassify prepayable debt securities from HTM to AFS and subsequently sell the securities, as long as the securities are eligible to be hedged. This update is effective for annual periods and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted in any interim period or fiscal year before the effective date. The Company early adopted ASU 2017-12 as of October 1, 2017. The Company reclassified certain prepayable debt securities from HTM to AFS during the first quarter of fiscal 2018. See Note 5 to the Notes to Condensed Consolidated Financial Statements for additional information on the securities reclassed.
ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This ASU allows equity investments that do not have a readily determinable fair value to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The ASU also requires enhanced disclosure about those investments. The ASU simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. Entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet are required to use the exit price notion consistent with Topic 820, Fair Value Measurement. This update will be effective for annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-01 on its consolidated financial statements.
NOTE 10. FAIR VALUE MEASUREMENTSSTOCKHOLDERS' EQUITY
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements defines fairRepurchase of Common Stock. The Company's Board of Directors authorized the September 3, 2021 share repurchase program to repurchase up to 6,000,000 shares of the Company's outstanding common stock. This authorization is effective from September 3, 2021 through September 30, 2024. During the nine months ended June 30, 2023 and 2022, the Company repurchased 2,316,814 and 2,447,699 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 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 inmethod under which the reporting entity transacts.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 June 30, 2023, 1,978,163 shares of common stock remained available for repurchase.
The fair value hierarchy is as follows:
Level 1 Inputs – Valuation is based upon quoted prices for identical instruments traded in active markets thatFor the nine months ended June 30, 2023 and 2022, the Company hasalso repurchased 59,626 and 67,158 shares, or $2.1 million and $3.8 million of common stock, respectively, in settlement of employee tax withholding obligations due upon the abilityvesting of restricted stock.
Retirement of Treasury Stock. The Company accounts for the retirement of repurchased shares, including treasury stock, using the par value method under which the repurchase price is charged to 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 onlypaid-in capital up to the extent that observable inputs are not available. These unobservable assumptions reflectamount of the Company’s own estimatesoriginal proceeds of assumptions that market participants would use in pricingthose shares. When the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Securities Available for Sale and Heldrepurchase price is greater than the original issue proceeds, the excess is charged to Maturity. Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The Company’s Level 1 securities include equity securities and mutual funds. Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds and corporate debt securities.retained earnings. The Company had no Level 3 securities at December 31, 2017 or Septemberretired zero shares of common stock held in treasury during the nine months ended June 30, 2017.2023 and 2022, respectively.
The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or valuation based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which significant assumptions are observable in the market (Level 2 inputs). The Company considers these valuations supplied by a third party provider which utilizes several sources for valuing fixed-income securities. These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology, and the third party provider’s own matrix and desk pricing. The Company, no less than annually, reviews the third party’s methods and source’s methodology for reasonableness and to ensure an understanding of inputs utilized in determining fair value. Sources utilized by the third party provider include but are not limited to pricing models that vary based by asset class and include available trade, bid, and other market information. This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. Monthly, the Company receives and compares prices provided by multiple securities dealers and pricing providers to validate the accuracy and reasonableness of prices received from the third party provider. On a monthly basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.
The following table summarizes the fair values of securities available for sale and held to maturity at December 31, 2017 and September 30, 2017. Securities available for sale are measured at fair value on a recurring basis, while securities held to maturity are carried at amortized cost in the consolidated statements of financial condition.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value At December 31, 2017 |
| | Available For Sale | | Held to Maturity |
| (Dollars in Thousands) | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Debt securities | | | | | | | | | | | | | | | |
| Small business administration securities | 56,948 |
| | — |
| | 56,948 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Obligations of states and political subdivisions | 14,610 |
| | — |
| | 14,610 |
| | — |
| | 4,342 |
| | — |
| | 4,342 |
| | — |
|
| Non-bank qualified obligations of states and political subdivisions | 1,223,030 |
| | — |
| | 1,223,030 |
| | — |
| | 227,482 |
| | — |
| | 227,482 |
| | — |
|
| Asset-backed securities | 95,823 |
| | — |
| | 95,823 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Mortgage-backed securities | 600,112 |
| | — |
| | 600,112 |
| | — |
| | 8,320 |
| | — |
| | 8,320 |
| | — |
|
| Total debt securities | 1,990,523 |
| | — |
| | 1,990,523 |
| | — |
| | 240,144 |
| | — |
| | 240,144 |
| | — |
|
| Common equities and mutual funds | 1,829 |
| | 1,829 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total securities | $ | 1,992,352 |
| | $ | 1,829 |
| | $ | 1,990,523 |
| | $ | — |
| | $ | 240,144 |
| | $ | — |
| | $ | 240,144 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value At September 30, 2017 |
| | Available For Sale | | Held to Maturity |
| (Dollars in Thousands) | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Debt securities | | | | | | | | | | | | | | | |
| Small business administration securities | 57,871 |
| | — |
| | 57,871 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Obligations of states and political subdivisions | — |
| | — |
| | — |
| | — |
| | 19,368 |
| | — |
| | 19,368 |
| | — |
|
| Non-bank qualified obligations of states and political subdivisions | 950,829 |
| | — |
| | 950,829 |
| | — |
| | 432,361 |
| | — |
| | 432,361 |
| | — |
|
| Asset-backed securities | 96,832 |
| | — |
| | 96,832 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Mortgage-backed securities | 586,454 |
| | — |
| | 586,454 |
| | — |
| | 112,456 |
| | — |
| | 112,456 |
| | — |
|
| Total debt securities | 1,691,986 |
| | — |
| | 1,691,986 |
| | — |
| | 564,185 |
| | — |
| | 564,185 |
| | — |
|
| Common equities and mutual funds | 1,445 |
| | 1,445 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total securities | $ | 1,693,431 |
| | $ | 1,445 |
| | $ | 1,691,986 |
| | $ | — |
| | $ | 564,185 |
| | $ | — |
| | $ | 564,185 |
| | $ | — |
|
Loans. The Company does not record loans at fair value on a recurring basis. However, if a loan is considered impaired, an allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, Receivables.
The following table summarizes the assets of the Company that were measured at fair value in the consolidated statements of financial condition on a non-recurring basis as of December 31, 2017 and September 30, 2017.
|
| | | | | | | | | | | | | | | |
| | Fair Value At December 31, 2017 |
| (Dollars in Thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Foreclosed Assets, net | 128 |
| | — |
| | — |
| | 128 |
|
| Total | $ | 128 |
| | $ | — |
| | $ | — |
| | $ | 128 |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value At September 30, 2017 |
| (Dollars in Thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Foreclosed Assets, net | 292 |
| | | | | | 292 |
|
| Total | $ | 292 |
| | $ | — |
| | $ | — |
| | $ | 292 |
|
|
| | | | | | | | | | | | |
| | Quantitative Information About Level 3 Fair Value Measurements |
| (Dollars in Thousands) | Fair Value at
December 31, 2017 | | Fair Value at
September 30, 2017 | | Valuation
Technique | | Unobservable Input | | Range of Inputs |
| Foreclosed Assets, net | $ | 128 |
| | 292 |
| | Market approach | | Appraised values (1) | | 4.00 - 10.00% |
| |
(1)
| The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs in a range of 4% to 10%.
|
The following table discloses the Company’s estimated fair value amounts of its financial instruments as of the dates set forth below. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of December 31, 2017 and September 30, 2017, as more fully described below. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values below.
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at December 31, 2017 and September 30, 2017.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Carrying
Amount | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in Thousands) |
| Financial assets | | | | | | | | | |
| Cash and cash equivalents | $ | 1,300,409 |
| | $ | 1,300,409 |
| | $ | 1,300,409 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
| Securities available for sale | 1,992,352 |
| | 1,992,352 |
| | 1,829 |
| | 1,990,523 |
| | — |
|
| Securities held to maturity | 243,492 |
| | 240,144 |
| | — |
| | 240,144 |
| | — |
|
| Total securities | 2,235,844 |
| | 2,232,496 |
| | 1,829 |
| | 2,230,667 |
| | — |
|
| | | | | | | | | | |
| Loans receivable: | |
| | |
| | |
| | |
| | |
|
| One to four family residential mortgage loans | 203,967 |
| | 205,413 |
| | — |
| | — |
| | 205,413 |
|
| Commercial and multi-family real estate loans | 654,029 |
| | 655,777 |
| | — |
| | — |
| | 655,777 |
|
| Agricultural real estate loans | 61,303 |
| | 61,257 |
| | — |
| | — |
| | 61,257 |
|
| Consumer loans | 274,981 |
| | 293,832 |
| | — |
| | — |
| | 293,832 |
|
| Commercial operating loans | 56,516 |
| | 56,520 |
| | — |
| | — |
| | 56,520 |
|
| Agricultural operating loans | 24,696 |
| | 24,506 |
| | — |
| | — |
| | 24,506 |
|
| CML insurance premium finance loans | 235,671 |
| | 235,530 |
| | — |
| | — |
| | 235,530 |
|
| Total loans receivable | 1,511,163 |
| | 1,532,835 |
| | — |
| | — |
| | 1,532,835 |
|
| | | | | | | | | | |
| Federal Home Loan Bank stock | 57,443 |
| | 57,443 |
| | — |
| | 57,443 |
| | — |
|
| Accrued interest receivable | 21,089 |
| | 21,089 |
| | 21,089 |
| | — |
| | — |
|
| | | | | | | | | | |
| Financial liabilities | |
| | |
| | |
| | |
| | |
|
| Noninterest bearing demand deposits | 2,779,645 |
| | 2,779,645 |
| | 2,779,645 |
| | — |
| | — |
|
| Interest bearing demand deposits, savings, and money markets | 185,376 |
| | 185,376 |
| | 185,376 |
| | — |
| | — |
|
| Certificates of deposit | 128,220 |
| | 127,451 |
| | — |
| | 127,451 |
| | — |
|
| Wholesale non-maturing deposits | 40,928 |
| | 40,928 |
| | 40,928 |
| | — |
| | — |
|
| Wholesale certificates of deposit | 379,476 |
| | 379,101 |
| | — |
| | 379,101 |
| | — |
|
| Total deposits | 3,513,645 |
| | 3,512,501 |
| | 3,005,949 |
| | 506,552 |
| | — |
|
| | | | | | | | | | |
| Advances from Federal Home Loan Bank | 210,000 |
| | 210,002 |
| | — |
| | 210,002 |
| | — |
|
| Federal funds purchased | 1,100,000 |
| | 1,100,000 |
| | 1,100,000 |
| | — |
| | — |
|
| Securities sold under agreements to repurchase | 3,339 |
| | 3,339 |
| | — |
| | 3,339 |
| | — |
|
| Capital lease | 1,922 |
| | 1,922 |
| | — |
| | 1,922 |
| | — |
|
| Trust preferred securities | 10,310 |
| | 10,445 |
| | — |
| | 10,445 |
| | — |
|
| Subordinated debentures | 73,382 |
| | 75,750 |
| | — |
| | 75,750 |
| | — |
|
| Accrued interest payable | 4,065 |
| | 4,065 |
| | 4,065 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Carrying
Amount | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | (Dollars in Thousands) |
| Financial assets | | | | | | | | | |
| Cash and cash equivalents | $ | 1,267,586 |
| | $ | 1,267,586 |
| | $ | 1,267,586 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
| Securities available for sale | 1,693,431 |
| | 1,693,431 |
| | 1,445 |
| | 1,691,986 |
| | — |
|
| Securities held to maturity | 563,529 |
| | 564,185 |
| | — |
| | 564,185 |
| | — |
|
| Total securities | 2,256,960 |
| | 2,257,616 |
| | 1,445 |
| | 2,256,171 |
| | — |
|
| | | | | | | | | | |
| Loans receivable: | |
| | |
| | |
| | |
| | |
|
| One to four family residential mortgage loans | 196,706 |
| | 196,970 |
| | — |
| | — |
| | 196,970 |
|
| Commercial and multi-family real estate loans | 585,510 |
| | 576,330 |
| | — |
| | — |
| | 576,330 |
|
| Agricultural real estate loans | 61,800 |
| | 61,584 |
| | — |
| | — |
| | 61,584 |
|
| Consumer loans | 163,004 |
| | 163,961 |
| | — |
| | — |
| | 163,961 |
|
| Commercial operating loans | 35,759 |
| | 35,723 |
| | — |
| | — |
| | 35,723 |
|
| Agricultural operating loans | 33,594 |
| | 32,870 |
| | — |
| | — |
| | 32,870 |
|
| CML insurance premium finance loans | 250,459 |
| | 250,964 |
| | — |
| | — |
| | 250,964 |
|
| Total loans receivable | 1,326,832 |
| | 1,318,402 |
| | — |
| | — |
| | 1,318,402 |
|
| | | | | | | | | | |
| Federal Home Loan Bank stock | 61,123 |
| | 61,123 |
| | — |
| | 61,123 |
| | — |
|
| Accrued interest receivable | 19,380 |
| | 19,380 |
| | 19,380 |
| | — |
| | — |
|
| | | | | | | | | | |
| Financial liabilities | |
| | |
| | |
| | |
| | |
|
| Noninterest bearing demand deposits | 2,454,057 |
| | 2,454,057 |
| | 2,454,057 |
| | — |
| | — |
|
| Interest bearing demand deposits, savings, and money markets | 169,557 |
| | 169,557 |
| | 169,557 |
| | — |
| | — |
|
| Certificates of deposit | 123,637 |
| | 123,094 |
| | — |
| | 123,094 |
| | — |
|
| Wholesale non-maturing deposits | 18,245 |
| | 18,245 |
| | 18,245 |
| | — |
| | — |
|
| Wholesale certificates of deposits | 457,928 |
| | 457,509 |
| | — |
| | 457,509 |
| | — |
|
| Total deposits | 3,223,424 |
| | 3,222,462 |
| | 2,641,859 |
| | 580,603 |
| | — |
|
| | | | | | | | | | |
| Advances from Federal Home Loan Bank | 415,000 |
| | 415,003 |
| | — |
| | 415,003 |
| | — |
|
| Federal funds purchased | 987,000 |
| | 987,000 |
| | 987,000 |
| | — |
| | — |
|
| Securities sold under agreements to repurchase | 2,472 |
| | 2,472 |
| | — |
| | 2,472 |
| | — |
|
| Capital lease | 1,938 |
| | 1,938 |
| | — |
| | 1,938 |
| | — |
|
| Trust preferred securities | 10,310 |
| | 10,447 |
| | — |
| | 10,447 |
| | — |
|
| Subordinated debentures | 73,347 |
| | 76,500 |
| | — |
| | 76,500 |
| | — |
|
| Accrued interest payable | 2,280 |
| | 2,280 |
| | 2,280 |
| | — |
| | — |
|
The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at December 31, 2017 and September 30, 2017.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities available for sale are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost. Fair values for investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.
LOANS RECEIVABLE, NET
The fair value of loans is estimated using a historical or replacement cost basis concept (i.e., an entrance price concept). The fair value of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers and for similar remaining maturities. When using the discounting method to determine fair value, homogeneous loans with similar terms and conditions were grouped together and discounted at a target rate at which similar loans would be made to borrowers at December 31, 2017 or September 30, 2017. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value as a result of the discounted cash flow which approximates the fair value adjustment for the credit quality component.
FEDERAL HOME LOAN BANK (“FHLB”) STOCK
The fair value of FHLB stock is assumed to approximate book value since the Company is only able to redeem this stock at par value.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to approximate the fair value.
DEPOSITS
The carrying values of non-interest bearing checking deposits, interest bearing checking deposits, savings, money markets, and wholesale non-maturing deposits are assumed to approximate fair value, since such deposits are immediately withdrawable without penalty. The fair value of time certificates of deposit and wholesale certificates of deposit were estimated by discounting expected future cash flows by the current rates offered on certificates of deposit with similar remaining maturities.
In accordance with ASC 825, Financial Instruments, no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangibles are not financial instruments as defined under ASC 825.
ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.
NOTE 11. GOODWILL AND INTANGIBLE ASSETSSTOCK COMPENSATION
The Company held a totalmaintains the Pathward Financial, Inc. 2002 Omnibus Incentive Plan, as amended and restated (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of $98.7 millionstock options, nonvested (restricted) shares, and performance share units ("PSUs") to certain officers and directors of goodwill asthe Company. Awards are granted by the Compensation Committee of December 31, 2017.the Board of Directors based on the performance of the award recipients or other relevant factors. No new awards are made under the 2002 Omnibus Incentive Plan following November 25, 2022, the date that the 2002 Omnibus Incentive Plan expired by its terms.
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 recorded goodwill was dueexercise price of options or fair value of nonvested (restricted) shares and performance share units granted under the Company’s 2002 Omnibus Incentive Plan is equal to two separate business combinations during fiscal 2015 and two separate business combinations during the first quarterfair market value of fiscal 2017.the underlying stock at the grant date, adjusted for dividends where applicable. The fiscal 2015 business combinations included $11.6 million of goodwill in connectionCompany has elected, with the purchaseadoption of substantially all of the commercial loan portfolio and related assets of AFS/IBEX on December 2, 2014 and $25.4 million of goodwill in connection with the purchase of substantially all of the assets and liabilities of Refund Advantage on September 8, 2015. The fiscal 2017 business combinations included $30.4 million of goodwill in connection with the purchase of substantially all of the assets of EPS Financial, LLC on November 1, 2016; and $31.4 million of goodwill in connection with the purchase of substantially all of the assets and specified liabilities of Specialty Consumer Services LP on December 14, 2016. The goodwill associated with these transactions is deductible for tax purposes.ASU 2016-09, to record forfeitures as they occur.
The changes infollowing tables show the carrying amountactivity of nonvested (restricted) shares and PSUs granted, vested, or forfeited under the Company’s goodwill and intangible assets2002 Omnibus Incentive Plan for the threenine months ended December 31, 2017 and 2016 were as follows:
|
| | | | | | | |
| | 2017 | | 2016 |
| | (Dollars in Thousands) |
| Goodwill | | | |
| Balance as of September 30, | $ | 98,723 |
| | $ | 36,928 |
|
| Acquisitions during the period | — |
| | 61,970 |
|
| Write-offs during the period | — |
| | — |
|
| Balance as of December 31, | $ | 98,723 |
| | $ | 98,898 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Trademark(1) | | Non-Compete(2) | | Customer
Relationships(3) | | All Others(4) | | Total |
| Intangibles | |
| Balance as of September 30, 2017 | $ | 10,051 |
| | $ | 1,782 |
| | $ | 31,707 |
| | $ | 8,638 |
| | $ | 52,178 |
|
| Acquisitions during the period | — |
| | — |
| | — |
| | 38 |
| | 38 |
|
| Amortization during the period | (159 | ) | | (132 | ) | | (1,160 | ) | | (230 | ) | | (1,681 | ) |
| Write-offs during the period | — |
| | — |
| | — |
| | (14 | ) | | (14 | ) |
| Balance as of December 31, 2017 | $ | 9,892 |
| | $ | 1,650 |
| | $ | 30,547 |
| | $ | 8,432 |
| | $ | 50,521 |
|
| | | | | | | | | | |
| Gross carrying amount | $ | 10,990 |
| | $ | 2,480 |
| | $ | 57,810 |
| | $ | 10,540 |
| | $ | 81,820 |
|
| Accumulated amortization | (1,098 | ) | | (830 | ) | | (17,015 | ) | | (1,565 | ) | | (20,508 | ) |
| Accumulated impairment | — |
| | — |
| | (10,248 | ) | | (543 | ) | | (10,791 | ) |
| Balance as of December 31, 2017 | $ | 9,892 |
| | $ | 1,650 |
| | $ | 30,547 |
| | $ | 8,432 |
| | $ | 50,521 |
|
(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.
|
| | | | | | | | | | | | | | | | | | | |
| | Trademark(1) | | Non-Compete(2) | | Customer
Relationships(3) | | All Others(4) | | Total |
| Intangibles | |
| Balance as of September 30, 2016 | $ | 5,149 |
| | $ | 127 |
| | $ | 20,590 |
| | $ | 3,055 |
| | $ | 28,921 |
|
| Acquisitions during the period | 5,480 |
| | 2,210 |
| | 32,230 |
| | 6,156 |
| | 46,076 |
|
| Amortization during the period | (120 | ) | | (86 | ) | | (1,193 | ) | | (126 | ) | | (1,525 | ) |
| Write-offs during the period | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance as of December 31, 2016 | $ | 10,509 |
| | $ | 2,251 |
| | $ | 51,627 |
| | $ | 9,085 |
| | $ | 73,472 |
|
| | | | | | | | | | |
| Gross carrying amount | $ | 10,970 |
| | $ | 2,510 |
| | $ | 58,270 |
| | $ | 9,711 |
| | $ | 81,461 |
|
| Accumulated amortization | (461 | ) | | (259 | ) | | (6,643 | ) | | (626 | ) | | (7,989 | ) |
| Balance as of December 31, 2016 | $ | 10,509 |
| | $ | 2,251 |
| | $ | 51,627 |
| | $ | 9,085 |
| | $ | 73,472 |
|
(1) Book amortization period of 15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in the remaining nine months of fiscal 2018 and subsequent fiscal years is as follows:
|
| | | |
| | (Dollars in Thousands) |
| Remaining in 2018 | $ | 6,028 |
|
| 2019 | 7,151 |
|
| 2020 | 5,753 |
|
| 2021 | 5,184 |
|
| 2022 | 4,262 |
|
| 2023 | 3,625 |
|
| Thereafter | 18,518 |
|
| Total anticipated intangible amortization | $ | 50,521 |
|
The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment.June 30, 2023. There were no impairments to intangible assetsoptions granted, exercised, or forfeited under this plan during the threenine months ended December 31, 2017 or 2016. The annual goodwill impairment test for fiscal 2018 willJune 30, 2023.
| | | | | | | | |
| Number of Shares | Weighted Average Fair Value at Grant |
| Nonvested shares outstanding, September 30, 2022 | 474,348 | | $ | 36.52 | |
| Granted | 160,881 | | 38.95 | |
| Vested | (209,440) | | 36.59 | |
| Forfeited or expired | (33,293) | | 48.90 | |
| Nonvested shares outstanding, June 30, 2023 | 392,496 | | $ | 36.42 | |
| | |
| Performance share units outstanding, September 30, 2022 | 96,689 | | $ | 42.59 | |
Granted(1) | 59,115 | | 38.94 | |
| Vested | — | | — | |
| Forfeited or expired | — | | — | |
| Performance share units outstanding, June 30, 2023 | 155,804 | | $ | 41.20 | |
(1) The number of PSUs granted reflects the target number of PSUs able to be earned under a given award. |
At June 30, 2023, stock-based compensation expense not yet recognized in income totaled $8.2 million, which is expected to be conducted at September 30, 2018. recognized over a weighted average remaining period of 1.45 years.
NOTE 12. INCOME TAXES
IncomeThe Company recorded an income tax expense of $19.0 million for the fiscal 2018 first quarter was $5.7 million,nine months ended June 30, 2023, resulting in an effective tax rate of 54.9%12.80%, compared to $0.3an income tax expense of $29.2 million, or an effective tax rate of 21.6%17.77%, for the nine months ended June 30, 2022. The Company’s effective tax rate was lower than the U.S. statutory rate of 21% primarily because of the effect of investment tax credits during fiscal 2017 first quarter.year 2023. The Company's effective tax rate in the future will depend in part on actual investment tax credits generated from qualified renewable energy property.
The Tax Cuts and Jobs Act (the "Tax Act") was signed into law on December 22, 2017. The Tax Act has a significant impact ontable below compares the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35 percent to 21 percent effective for taxable years beginning on or after January 1, 2018 in addition to implementing numerous other changes. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
As a result of the Tax Act, the Company remeasured its deferred tax assets and deferred tax liabilities during its fiscal 2018 first quarter, resulting in additional income tax expense components for the periods presented.
| | | | | | | | | | | |
| Nine Months Ended June 30, |
| (Dollars in thousands) | 2023 | | 2022 |
| Provision at statutory rate | $ | 30,808 | | | $ | 34,063 | |
| Tax-exempt income | (600) | | | (541) | |
| State income taxes | 6,109 | | | 6,728 | |
| Interim period effective rate adjustment | (3,065) | | | (2,849) | |
| Tax credit investments, net - federal | (13,669) | | | (6,994) | |
| Research tax credit | (805) | | | (355) | |
| IRC 162(m) nondeductible compensation | 928 | | | 801 | |
| Other, net | (710) | | | (1,617) | |
| Income tax expense | $ | 18,996 | | | $ | 29,236 | |
| Effective tax rate | 12.80 | % | | 17.77 | % |
NOTE 13. 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 fiscal year end ends on September 30, the statutory corporate rate for fiscal 2018 will be prorated to 24.53 percent.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared or analyzed sufficiently to complete its accounting for the effectrevenue by operating segment. For additional descriptions of the changes inCompany’s operating segments, including additional financial information and the Tax Act.underlying management accounting process, see Note 14. Segment Reporting to the Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Consumer | | Commercial | | Corporate Services/Other | | Consolidated Company |
| Three Months Ended June 30, | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 |
Net interest income(1) | $ | 40,683 | | $ | 23,213 | | | $ | 53,067 | | $ | 46,802 | | | $ | 3,715 | | $ | 2,136 | | | $ | 97,465 | | $ | 72,151 | |
| Noninterest income: | | | | | | | | | | | |
| Refund transfer product fees | 8,262 | | 10,289 | | | — | | — | | | — | | — | | | 8,262 | | 10,289 | |
Refund advance fee income(1) | (927) | | (20) | | | — | | — | | | — | | — | | | (927) | | (20) | |
| Card and deposit fees | 39,450 | | 24,673 | | | 253 | | 252 | | | 5 | | 10 | | | 39,708 | | 24,935 | |
Rental income(1) | — | | — | | | 13,756 | | 11,890 | | | 224 | | 192 | | | 13,980 | | 12,082 | |
Gain on sale of securities(1) | — | | — | | | — | | — | | | 9 | | 198 | | | 9 | | 198 | |
| | | | | | | | | | | |
Gain on sale of other(1) | — | | — | | | 812 | | 1,239 | | | — | | — | | | 812 | | 1,239 | |
Other income(1) | 1,929 | | 1,284 | | | 1,888 | | 2,479 | | | 2,072 | | 1,508 | | | 5,889 | | 5,271 | |
| Total noninterest income | 48,714 | | 36,226 | | | 16,709 | | 15,860 | | | 2,310 | | 1,908 | | | 67,733 | | 53,994 | |
| Revenue | $ | 89,397 | | $ | 59,439 | | | $ | 69,776 | | $ | 62,662 | | | $ | 6,025 | | $ | 4,044 | | | $ | 165,198 | | $ | 126,145 | |
| | | | | | | | | | | |
| Nine Months Ended June 30, | | | | | | | | | | | |
Net interest income(1) | $ | 116,373 | | $ | 79,323 | | | $ | 142,149 | | $ | 136,923 | | | $ | 24,405 | | $ | 11,318 | | | $ | 282,927 | | $ | 227,564 | |
| Noninterest income: | | | | | | | | | | | |
| Refund transfer product fees | 39,144 | | 38,674 | | | — | | — | | | — | | — | | | 39,144 | | 38,674 | |
Refund advance fee income(1) | 37,685 | | 40,513 | | | — | | — | | | — | | — | | | 37,685 | | 40,513 | |
| Card and deposit fees | 118,730 | | 76,075 | | | 766 | | 728 | | | 17 | | 22 | | | 119,513 | | 76,825 | |
Rental income(1) | — | | — | | | 39,008 | | 34,192 | | | 620 | | 342 | | | 39,628 | | 34,534 | |
Gain on sale of securities(1) | — | | — | | | — | | — | | | 91 | | 595 | | | 91 | | 595 | |
| Gain on sale of trademarks | — | | — | | | — | | — | | | 10,000 | | 50,000 | | | 10,000 | | 50,000 | |
Gain (loss) on sale of other(1) | — | | — | | | 566 | | 7,331 | | | — | | (8,932) | | | 566 | | (1,601) | |
Other income(1) | 4,470 | | 3,434 | | | 4,907 | | 8,103 | | | 4,544 | | (726) | | | 13,921 | | 10,811 | |
| Total noninterest income | 200,029 | | 158,696 | | | 45,247 | | 50,354 | | | 15,272 | | 41,301 | | | 260,548 | | 250,351 | |
| Revenue | $ | 316,402 | | $ | 238,019 | | | $ | 187,396 | | $ | 187,277 | | | $ | 39,677 | | $ | 52,619 | | | $ | 543,475 | | $ | 477,915 | |
(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 income tax expense of $3.6 million recorded duringCompany provides services to customers that have related performance obligations that must be completed to recognize revenue. Revenues are generally recognized immediately upon the fiscal 2018 first quarter represents all known and estimable impactscompletion of the Tax Act and is a provisional amount based onservice or over time as services are performed. Any services performed over time generally require that the Company’s current best estimate. This provisional amount incorporates assumptions madeCompany renders services each period; therefore, the Company measures progress in completing these services based upon the Company’s current interpretationspassage of time. Revenue from contracts with customers did not generate significant contract assets and liabilities for the nine months ended June 30, 2023.
Refund Transfer Product Fees. Refund transfer fees are specific to the Banking as a Service ("BaaS") business line and reflect product fees offered by the Company through third-party tax preparers and tax preparation software providers where the Company acts as the partnering financial institution. A refund transfer allows a taxpayer to pay tax preparation and filing fees directly from their federal or state government tax refund, with the remainder of the Tax Actrefund being disbursed in accordance with the terms and conditions of the taxpayer agreement, which may changeinclude satisfaction of other disbursement obligations before going directly to the taxpayer via check, direct deposit, or prepaid card. Refund transfer fees are recognized by the Company immediately after the taxpayer's refund has been disbursed in accordance with the contract and are based on standalone pricing included within the terms and conditions. Certain expenses to tax preparation software providers are netted with refund transfer fee income as the Company receives additional clarificationis considered the agent in these contractual relationships. All refund transfer fees are recorded within the Consumer reporting segment.
Card and implementation guidance,Deposit Fees. Card fees relate to the BaaS business line and consists of income from prepaid cards and merchant services, including interchange fees from prepaid cards processed through card association networks, merchant services and other card related services. Interchange rates are generally set by card association networks based on transaction volume and other factors. Since interchange fees are generated by cardholder activity, the Company recognizes the income as data becomes available allowingtransactions occur. Fee income for a more accurate schedulingmerchant services and other card related services reflect account management and transaction fees charged to merchants for processing card association network transactions. The associated income is recognized as transactions occur or as services are performed. For the Company's internally managed prepaid card programs, fees are based on standalone pricing within the terms and conditions of the deferred tax assetscardholder agreement. The Company is considered the principal of these relationships resulting in all fee income being presented on a gross basis within the Condensed Consolidated Statement of Operations. For the Company's sponsorship prepaid card programs where a third-party is considered the Program Manager, the fees are based on standalone pricing within the terms and liabilities, including those related to items potentially impacted byconditions of the Tax Act such as fixed assetsProgram Agreement. For these relationships, the Company is considered the agent and employee compensation. Adjustments to this provisional amount through December 22, 2018 will becertain expenses with the Program Manager, networks and associations are netted with card fee revenue. All card fee income is included in the Consumer reporting segment.
Deposit fees relate to the BaaS and Commercial Finance business lines and consist of income from operationsbanking and deposit-related services, including account services, overdraft protection, and wire transfers. Fee income for account services is recognized over the course of the month as an adjustmentthe performance obligation is satisfied. Fee income for overdraft protection and wire transfers is recognized at the point in time when such event occurs. For BaaS, the fees for account services and overdraft protection are based on standalone pricing within the terms and conditions of the Program Agreement with the sponsorship partner. For these relationships, the Company is considered the agent and certain expenses with the partner are netted with deposit fee revenue. For Commercial Finance, fees for wire transfers are based on standalone pricing within the terms and conditions of the customer deposit agreement. Bank and deposit fees for the BaaS and Commercial Finance business lines are included in the Consumer and Commercial reporting segments, respectively. Also included within Card and Deposit Fees for the Consumer reporting segment are servicing fees the Company recognizes for custodial off-balance sheet deposits. This fee income is for services the Bank performs to tax expense in future periods.
NOTE 13. REGULATORY MATTERS
On January 5, 2015,maintain records of cardholder funds placed at one or more third-party banks insured by the Federal Deposit Insurance Corporation (“FDIC”("FDIC") published industry guidance. The servicing fee is typically reflective of the effective federal funds rate ("EFFR").
NOTE 14. 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 BaaS business line is reported in the formConsumer segment. The Commercial Finance business line is reported in the Commercial segment. The Corporate Services/Other segment includes certain shared services as well as treasury related functions such as the investment portfolio, warehouse finance, wholesale deposits and borrowings.
The following tables present segment data for the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Consumer | | Commercial | | Corporate Services/Other | | Total |
| Three Months Ended June 30, | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 |
| Net interest income | $ | 40,683 | | $ | 23,213 | | | $ | 53,067 | | $ | 46,802 | | | $ | 3,715 | | $ | 2,136 | | | $ | 97,465 | | $ | 72,151 | |
| Provision for (reversal of) credit losses | 508 | | (279) | | | 1,265 | | (752) | | | — | | (271) | | | 1,773 | | (1,302) | |
| Noninterest income | 48,714 | | 36,226 | | | 16,709 | | 15,860 | | | 2,310 | | 1,908 | | | 67,733 | | 53,994 | |
| Noninterest expense | 39,666 | | 23,960 | | | 33,594 | | 31,336 | | | 41,318 | | 41,354 | | | 114,578 | | 96,650 | |
| Income (loss) before income tax expense | 49,223 | | 35,758 | | | 34,917 | | 32,078 | | | (35,293) | | (37,039) | | | 48,847 | | 30,797 | |
| | | | | | | | | | | |
| Total assets | 455,540 | | 373,019 | | | 3,914,924 | | 3,457,004 | | | 3,088,161 | | 2,898,155 | | | 7,458,625 | | 6,728,178 | |
| Total goodwill | 87,145 | | 87,145 | | | 222,360 | | 222,360 | | | — | | — | | | 309,505 | | 309,505 | |
| Total deposits | 6,130,524 | | 5,573,768 | | | 7,550 | | 11,177 | | | 168,902 | | 125,854 | | | 6,306,976 | | 5,710,799 | |
| | | | | | | | | | | |
| Nine Months Ended June 30, | | | | | | | | | | | |
| Net interest income | $ | 116,373 | | $ | 79,323 | | | $ | 142,149 | | $ | 136,923 | | | $ | 24,405 | | $ | 11,318 | | | $ | 282,927 | | $ | 227,564 | |
| Provision for (reversal of) credit losses | 35,402 | | 30,667 | | | 12,860 | | 13,045 | | | 50 | | (12,526) | | | 48,312 | | 31,186 | |
| Noninterest income | 200,029 | | 158,696 | | | 45,247 | | 50,354 | | | 15,272 | | 41,301 | | | 260,548 | | 250,351 | |
| Noninterest expense | 124,070 | | 73,509 | | | 105,189 | | 95,845 | | | 117,514 | | 112,892 | | | 346,773 | | 282,246 | |
| Income (loss) before income tax expense | 156,930 | | 133,843 | | | 69,347 | | 78,387 | | | (77,887) | | (47,747) | | | 148,390 | | 164,483 | |
| | | | | | | | | | | |
| Total assets | 455,540 | | 373,019 | | | 3,914,924 | | 3,457,004 | | | 3,088,161 | | 2,898,155 | | | 7,458,625 | | 6,728,178 | |
| Total goodwill | 87,145 | | 87,145 | | | 222,360 | | 222,360 | | | — | | — | | | 309,505 | | 309,505 | |
| Total deposits | 6,130,524 | | 5,573,768 | | | 7,550 | | 11,177 | | | 168,902 | | 125,854 | | | 6,306,976 | | 5,710,799 | |
NOTE 15. 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 categorizationextent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of deposit liabilitiesassumptions 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 “brokered” deposits. On November 13, 2015,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 FDIC issuedprices obtained from independent asset pricing services for comment updatedunusual fluctuations and annotated FAQs,compares 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).
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.
| | | | | | | | | | | | | | |
| | At June 30, 2023 |
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
| Debt securities AFS | | | | |
| Corporate securities | $ | 18,750 | | $ | — | | $ | 18,750 | | $ | — | |
| SBA securities | 90,605 | | — | | 90,605 | | — | |
| Obligations of states and political subdivisions | 2,311 | | — | | 2,311 | | — | |
| Non-bank qualified obligations of states and political subdivisions | 238,375 | | — | | 238,375 | | — | |
| Asset-backed securities | 254,566 | | — | | 254,566 | | — | |
| Mortgage-backed securities | 1,309,664 | | — | | 1,309,664 | | — | |
| Total debt securities AFS | $ | 1,914,271 | | $ | — | | $ | 1,914,271 | | $ | — | |
Common equities and mutual funds(1) | $ | 3,527 | | $ | 3,527 | | $ | — | | $ | — | |
Non-marketable equity securities(2) | $ | 8,469 | | $ | — | | $ | — | | $ | — | |
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at June 30, 2016, the FDIC finalized the FAQs. The Company believes2023.
(2) Consists of certain non-marketable equity securities that the final FAQs do not materially impact the processes that it uses to identify, accept and report brokered deposits. On April 26, 2016, the FDIC issued a final rule to amend how small banks (less than $10 billion in assets that have been FDIC insured forare measured at least five years) are assessed for deposit insurance (the "Final Rule"fair value using net asset value ("NAV"). The Final Rule imposes higher assessments for banks that the FDIC believes present higher risk profiles. The Final Rule became effective with the Bank's December 2016 assessment invoice, which the Company received in March 2017.
Due to the Bank’s status per share (or its equivalent) as a "well-capitalized" institution underpractical expedient and are excluded from the FDIC's prompt corrective action regulations,fair value hierarchy.
| | | | | | | | | | | | | | |
| | At September 30, 2022 |
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
| Debt securities AFS | | | | |
| Corporate securities | $ | 22,187 | | $ | — | | $ | 22,187 | | $ | — | |
| SBA securities | 97,768 | | — | | 97,768 | | — | |
| Obligations of states and political subdivisions | 2,344 | | — | | 2,344 | | — | |
| Non-bank qualified obligations of states and political subdivisions | 263,783 | | — | | 263,783 | | — | |
| Asset-backed securities | 147,790 | | — | | 147,790 | | — | |
| Mortgage-backed securities | 1,348,997 | | — | | 1,348,997 | | — | |
| Total debt securities AFS | $ | 1,882,869 | | $ | — | | $ | 1,882,869 | | $ | — | |
Common equities and mutual funds(1) | $ | 2,874 | | $ | 2,874 | | $ | — | | $ | — | |
Non-marketable equity securities(2) | $ | 7,212 | | $ | — | | $ | — | | $ | — | |
(1) Equity securities at fair value are included within other assets on the Consolidated Statements of Financial Condition at September 30, 2022.
(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 further with respect toare excluded from the Bank’s financial condition in general, thefair value hierarchy.
Loans and Leases. The Company does not record loans and leases at this time anticipate that eitherfair 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 FAQs orvalues of the Final Rule will haveunderlying collateral, the Company measures fair value on a material adverse impactnonrecurring 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 the Company’s business operations. However, shouldinternal estimates and/or assessment provided by third-party appraisers and the Bank ever failvaluation relies on discount rates ranging from 3% to be well-capitalized18%.
The following table summarizes the assets of the Company that are measured at fair value in the future,Condensed Consolidated Statements of Financial Condition on a non-recurring basis:
| | | | | | | | | | | | | | |
| | At June 30, 2023 |
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
| Loans and leases, net individually evaluated for credit loss | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Commercial finance | $ | 4,113 | | $ | — | | $ | — | | $ | 4,113 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total loans and leases, net individually evaluated for credit loss | 4,113 | | — | | — | | 4,113 | |
| | | | |
| Total | $ | 4,113 | | $ | — | | $ | — | | $ | 4,113 | |
| | | | | | | | | | | | | | |
| | At September 30, 2022 |
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
| Loans and leases, net individually evaluated for credit loss | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Commercial finance | $ | 1,575 | | $ | — | | $ | — | | $ | 1,575 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total loans and leases, net individually evaluated for credit loss | 1,575 | | — | | — | | 1,575 | |
| Foreclosed assets, net | 1 | | — | | — | | 1 | |
| Total | $ | 1,576 | | $ | — | | $ | — | | $ | 1,576 | |
| | | | | | | | | | | | | | | | | |
| | Quantitative Information About Level 3 Fair Value Measurements |
| (Dollars in thousands) | Fair Value at June 30, 2023 | Fair Value at September 30, 2022 | Valuation
Technique | Unobservable Input | Range of Inputs |
| Loans and leases, net individually evaluated for credit loss | $ | 4,113 | | $ | 1,575 | | Market approach | Appraised values(1) | 3% - 18% |
| | | | | |
(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 3% to 18%.
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 June 30, 2023 and September 30, 2022 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.
The following tables present the carrying amount and estimated fair value of the financial instruments held by the Company:
| | | | | | | | | | | | | | | | | |
| | At June 30, 2023 |
| (Dollars in thousands) | Carrying
Amount | Estimated
Fair Value | Level 1 | Level 2 | Level 3 |
| Financial assets | | | | | |
| Cash and cash equivalents | $ | 515,271 | | $ | 515,271 | | $ | 515,271 | | $ | — | | $ | — | |
| Debt securities available for sale | 1,914,271 | | 1,914,271 | | — | | 1,914,271 | | — | |
| Debt securities held to maturity | 37,725 | | 33,670 | | — | | 33,670 | | — | |
Common equities and mutual funds(1) | 3,527 | | 3,527 | | 3,527 | | — | | — | |
Non-marketable equity securities(1)(2) | 20,533 | | 20,533 | | — | | 12,064 | | — | |
| Loans held for sale | 87,351 | | 87,351 | | — | | 87,351 | | — | |
| Loans and leases | 4,068,511 | | 4,006,176 | | — | | — | | 4,006,176 | |
| Federal Reserve Bank and Federal Home Loan Bank stocks | 30,890 | | 30,890 | | — | | 30,890 | | — | |
| Accrued interest receivable | 22,332 | | 22,332 | | 22,332 | | — | | — | |
| Financial liabilities | | | | | |
| | | | | |
| Deposits | 6,306,976 | | 6,306,818 | | 6,301,147 | | 5,671 | | — | |
| Overnight federal funds purchased | 230,000 | | 230,000 | | 230,000 | | — | | — | |
| | | | | |
| Other short- and long-term borrowings | 34,178 | | 31,853 | | — | | 31,853 | | — | |
| Accrued interest payable | 802 | | 802 | | 802 | | — | | — | |
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at June 30, 2023.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a result of failing to meet the well-capitalized requirements, or the imposition of an individual minimum capital requirement or similar formal requirements, then, notwithstanding that the Bank has capital in excess of the well-capitalized minimum requirements, the Bank would be prohibited, absent waiverpractical expedient and are excluded from the FDIC, from utilizing brokered deposits (i.e., may not accept, renew or rollover brokered deposits), which could produce serious adverse effectsfair value hierarchy.
| | | | | | | | | | | | | | | | | |
| | At September 30, 2022 |
| (Dollars in thousands) | Carrying
Amount | Estimated
Fair Value | Level 1 | Level 2 | Level 3 |
| Financial assets | | | | | |
| Cash and cash equivalents | $ | 388,038 | | $ | 388,038 | | $ | 388,038 | | $ | — | | $ | — | |
| Debt securities available for sale | 1,882,869 | | 1,882,869 | | — | | 1,882,869 | | — | |
| Debt securities held to maturity | 41,682 | | 38,171 | | — | | 38,171 | | — | |
Common equities and mutual funds(1) | 2,874 | | 2,874 | | 2,874 | | — | | — | |
Non-marketable equity securities(1)(2) | 22,526 | | 22,526 | | — | | 15,314 | | — | |
| Loans held for sale | 21,071 | | 21,071 | | — | | 21,071 | | — | |
| Loans and leases | 3,529,280 | | 3,525,803 | | — | | — | | 3,525,803 | |
| Federal Reserve Bank and Federal Home Loan Bank stocks | 28,812 | | 28,812 | | — | | 28,812 | | — | |
| Accrued interest receivable | 17,979 | | 17,979 | | 17,979 | | — | | — | |
| Financial liabilities | | | | | |
| Deposits | 5,866,037 | | 5,865,854 | | 5,858,283 | | 7,571 | | — | |
| | | | | |
| | | | | |
| Other short- and long-term borrowings | 36,028 | | 35,986 | | — | | 35,986 | | — | |
| Accrued interest payable | 192 | | 192 | | 192 | | — | | — | |
(1) Equity securities at fair value are included within other assets on the Company’s liquidity,Consolidated Statements of Financial Condition at September 30, 2022.
(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 financial condition and results of operations. Similarly, shouldare excluded from the Bank’s financial condition in general deteriorate, future FDIC assessments could have a material adverse effect on the Company.fair value hierarchy.
NOTE 14.16. SUBSEQUENT EVENTS
On January 2, 2018, a deed in lieu of foreclosure was executed on the collateral for a large, well-collateralized loan relationship. Upon execution of the deed in lieu, the Company took ownership of the properties serving as collateral and transferred the loans to foreclosed real estate and repossessed assets. If, as expected, the properties are sold prior
Management has evaluated subsequent events that occurred after June 30, 2023. During this period, up to the endfiling date of the agreed-upon receivership period set forththis Quarterly Report on Form 10-Q, management did not identify any material subsequent events that would require recognition or disclosure in the settlement agreement, the Company will be entitled to all principal, note interest, legal and other fees and expenses. After the receivership period ends, if the properties are not sold, the Company will be entitled to the fair valueour Condensed Consolidated Financial Statements as of the properties.
On January 9, 2018, the Company announced that it entered into a definitive merger agreement with Crestmark Bancorp, Inc. (“Crestmark”), the holding company of Crestmark Bank, whereby the Company will acquire Crestmark in an all-stock transaction.
Pursuant to the terms of the merger agreement, at the effective time of the merger, Crestmark will merge with and into the Company, and Crestmark Bank will merge with and into MetaBank (the "Bank").
Under the terms of the merger agreement, Crestmark shareholders will receive 2.65 shares of the Company's common stock for each share of Crestmark common stock. The aggregate value of the acquisition consideration, based on the closing price of Meta Financial shares on January 8, 2018 of $91.35, would have been $320.6 million. Giving effect to the transaction, existing shareholders of the Company are expected to own approximately 75%, and Crestmark shareholders are expected to own approximately 25%, of the outstanding shares of the Company.
On January 25, 2018, the Company announced that the Bank entered into a three-year program agreement with Liberty Lending, LCC ("Liberty"), whereby the Bank will provide personal loans to Liberty customers. Under the agreement, the Bank expects to originate between $500 million and $1 billion in personal loans during the term of the program. The loan products contemplated under this agreement will be closed-end installment loans ranging from $3,500 to $45,000 in principal amount with lengths of between 13 and 60 months. The Bank expects to begin providing such loans as early as the third quarter of fiscal 2018. The Bank has the contractual right to sell these loans or interests in the loans. The agreement marks the entry point for the Company into a direct-to-consumer credit business.quarter ended June 30, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
METAPATHWARD FINANCIAL, GROUP, INC®.INC.®
AND SUBSIDIARIES
FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
Meta Financial Group, Inc.®, (“Meta Financial”PATHWARD FINANCIAL, INC. ("Pathward Financial" or “the Company”the "Company" or “us”"us") and its wholly-owned subsidiary, MetaBank® (the “Bank”Pathward®, National Association ("Pathward®, N.A" or “MetaBank”"Pathward" 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, in itsthe Company’s other filings with the Securities and Exchange Commission (“SEC”(the "SEC"), in itsthe Company’s reports to stockholders, and in other communications by the Company and the Bank,Pathward, N.A, 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;results including our performance expectations; the performance of our securities portfolio; the impact of card balances related to government stimulus programs; customer retention; loan and other product demand; important components of the Company's statements of financial condition and operations; growth and expansion; new products and services, such as those offered byservices; credit quality; the Bank orlevel of net charge-offs and the Company's Payments divisions (which includes Meta Payments Systems (“MPS”) and its tax-related financial solutions divisions: Refund Advantage, EPS Financial (“EPS”) and Specialty Consumer Services (“SCS”)); credit quality and adequacy of reserves; technology;the allowance for credit losses; and the Company's employees.technology. 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: the risk that the transaction with Crestmark may not occur on a timely basis or at all; the parties’ ability to obtain regulatory approvals and approval of their respective shareholders, and otherwise satisfy the other conditions to closing, on a timely basis or at all; the risk that the businesses of the Company and MetaBank, on the one hand, and Crestmark and Crestmark Bank, on the other hand, may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; themaintaining our executive management team; expected growth opportunities beneficial synergies and/or operating efficiencies from the proposed transaction with Crestmark may not be fully realized or may take longer to realize than expected; customer lossesthe potential adverse effects of unusual and business disruption following the announcement or consummation of the proposed transaction; potential litigation relating to the proposed merger transaction; the risk that the Company may incur unanticipated or unknown losses or liabilities if it completes the proposed transaction with Crestmark and Crestmark Bank; the risk that the Company’s preliminary analysis ofinfrequently occurring events, including the impact ofon financial markets from geopolitical conflicts such as the Tax Act may be incorrect; additional changes in tax laws;military conflict between Russia and Ukraine, weather-related disasters, or public health events, such as the risk that the Bank may be unableCOVID-19 pandemic, and any governmental or societal responses thereto; our ability to originate between $500 millionachieve brand recognition for Pathward equal to or greater than we enjoyed for MetaBank; our ability to successfully implement measures designed to reduce expenses and $1 billion in personal loans during the three-year term of the program agreement with Liberty Lending, LLC; the risk that we are unable to recoup a significant portion of the lost earnings associated with the non-renewal of the agreement with H&R Block through agreements with new tax partners and expanded relationships with existing tax partners; the risk that loan production levels and other anticipated benefits related to the agreement with Jackson Hewitt Tax Service®, as extended, may not be as much as anticipated; maintaining our executive management team; the strength of the United States' economy, in general, and the strength of the local economies in which the Company conducts operations; the effects of, andincrease efficiencies; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate, policies ofand their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios; changes in tax laws; the Board of Governors of the Federal Reserve System (the “Federal Reserve”), as well as effortsstrength of the United States Treasury in conjunction with bank regulatory agencies to stimulate theStates' economy, and protectthe local economies in which the Company operates; adverse developments in the financial system;services industry generally such as bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; inflation, interest rate, market, and monetary fluctuations; the timely development of, and acceptanceefficient development 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; Pathward's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance business,businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or acceptance of usage of the Company’sPathward’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by, our regulators in the future; the impact ofregulators; changes in financial services laws and regulations, including but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry; our relationship with our primary regulators, the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve, as well as the Federal Deposit Insurance Corporation (“FDIC”), which insures the Bank’s deposit accounts up to applicable limits; technological changes, including, but not limited to, the protection of our electronic files or databases; acquisitions;systems and information; the impact of acquisitions and divestitures; litigation risk, in general, including, but not limited to, those risks involving the Bank's divisions;risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by the BankPathward 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”;institution; changes in consumer borrowing, spending, and saving habits; 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.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 theirits entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are includedreflected under the caption "Risk Factors"“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, 20172022, and in the Company's 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.
GENERAL
The Company, a registered unitary savings and loanbank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savingsnational bank. Unless the context otherwise requires, references herein to the Company include MetaPathward Financial and the Bank, and all direct or indirect subsidiaries of MetaPathward Financial 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, 2017,June 30, 2023, compared to September 30, 2017,2022, and the consolidated results of operations for the three and nine months ended December 31, 2017June 30, 2023 and 2016.2022. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the fiscal year ended September 30, 20172022 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, 2017.2022.
BUSINESS DEVELOPMENTSEXECUTIVE SUMMARY
On January 9, 2018,
Company Highlights
•The Company launched a new line of credit for consumers with Propel Holdings Inc. and paired with Clair to offer spending and savings accounts as well as earned wage advances. Additionally, the Company announced thata new partnership where it entered intohas become the banking partner to Finix to support their launch as a definitive merger agreement with Crestmark Bancorp, Inc. (“Crestmark”), the holding company of Crestmark Bank, wherebypayments processor.
•On July 24, 2023, the Company will acquire Crestmark in an all-stock transaction.
Pursuant to the terms of the merger agreement, at the effective time of the merger, Crestmark will merge with and into the Company, and Crestmark Bank will merge with and into MetaBank. As of September 30, 2017, the Bank had $5.2 billion in assets and $1.3 billion in total loans and,published its third annual ESG report, which can be found on a pro forma consolidated basis, the combined company would have had approximately $6.4 billion in assets and $2.2 billion in loans and leases, or 34% of total assets, with lending operations throughout the U.S.
Under the terms of the merger agreement, Crestmark shareholders will receive 2.65 shares ofits website. The report documents the Company's common stock for each shareprogress over fiscal year 2022 showing the implementation of Crestmark common stock. The aggregate value of the acquisition consideration, basedplans, programs and policies that built on the closing price of Meta Financial shares on January 8, 2018, of $91.35, would have been $320.6 million. Giving effect to the transaction, existing shareholders of the Company are expected to own approximately 75%, and Crestmark shareholders are expected to own approximately 25%, of the outstanding shares of the Company.
Crestmark, through Crestmark Bank, is a commercial lender offering asset-based loans, equipment finance leases and government guaranteed loans to small and mid-sized businesses across the US. Crestmark focuses on working with a broad range of industries, including manufacturing, transportation and health care. Crestmark will operate as a division of MetaBank and will continue to operate from its offices in Troy, Michigan.
On January 25, 2018, the Company announced that MetaBank entered into a three year program agreement with Liberty Lending, LLC ("Liberty"), whereby MetaBank will provide personal loans to Liberty customers. Under the agreement, the Bank expects to originate between $500 million and $1 billion in personal loans during the term of the program. The loan products contemplated under this agreement will be closed-end installment loans ranging from $3,500 to $45,000 in principal amount with lengths of between 13 and 60 months. The Bank expects to begin providing such loans as early as the third quarter of fiscal 2018. The Bank has the contractual right to sell these loans or interests in the loans. The agreement marks the entry point for the Company into a direct-to-consumer credit business.
As previously disclosed, on October 11, 2017, the Company completed the purchase of a $73.0 million, seasoned, floating rate, private student loan portfolio. All loans are indexed to one-month LIBOR. The portfolio is serviced by ReliaMax Lending Services LLC and insured by ReliaMax Surety Company. This portfolio purchase builds on the Company's existing student loan platform.
OVERVIEW OF FINANCIAL PERFORMANCE
The Company recorded net income of $4.7 million, or $0.48 per diluted share, for the three months ended December 31, 2017, compared to net income of $1.2 million, or $0.14 per diluted share, for the three months ended December 31, 2016, an increase of 275%. Included in the 2018 fiscal first quarter net income was an additional, non recurring income tax expense of $3.6 million from a reduction in the value of certain deferred tax assets as a result of the Tax Cuts and Jobs Act (the "Tax Act") signed into law on December 22, 2017. The 2018 fiscal first quarter pre-tax results included a $1.0 million loss on sale of investments and $1.3 million of acquisition expenses. The 2018 fiscal first quarter pre-tax results also included $1.7 million in amortization of intangible assets and $1.3 million in non-cash stock-related compensation associated with executive officer employment agreements.
Net interest income was $26.2 million in the 2018 fiscal first quarter, an increase of $6.4 million, or 32%, compared to the first quarter of fiscal 2017. This increase was primarily a result of high credit quality loan growth in both the commercial insurance premium finance loan portfolio and community banking loan portfolio,culture as well as the purchased floating rate student loans. Also contributingCompany's purpose to power Financial Inclusion for All.
Financial Highlights for the improvement were increases in higher yielding securities balances, primarily due to highly-rated tax-exempt municipal securities at relatively high tax equivalent yields and a continuing improvement in2023 Fiscal Third Quarter
•Total revenue for the overall interest-earning asset mix.
Card fee income increased $6.8third quarter was $165.2 million, an increase of $39.1 million, or 37%31%, for the 2018 fiscal first quarter when compared to the same quarter in 2017. Thisfiscal 2022, driven by an increase was duein both net interest income and noninterest income.
•Net interest margin ("NIM") increased 142 basis points to residual fees related to a wind down of two of our non-strategic programs. The Company expects fiscal year 2018 total card fee income to be between $95.0 million and $101.0 million and expects total card processing expense to be between $23.0 million and $27.0 million.
Total tax product fee income increased $1.5 million, or 242%, from $0.6 million6.18% for the three months ended Decemberthird quarter from 4.76% during the same period of last year primarily driven by increased yields and an improved earnings asset mix from the continued optimization of the portfolio.
•Total gross loans and leases at June 30, 2023 increased $384.3 million to $4.07 billion compared to June 30, 2022 and increased $347.3 million, or 9%, when compared to March 31, 20162023. The increase compared to $2.1 million for the three months ended December 31, 2017. This increaseprior year quarter was primarily due to the volume of pre-season tax advance loans originated during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. All of these loans are being held during fiscal 2018, as opposed to the previous year when many of these loans were sold, which also contributed to the increase.
The Company's 2018 fiscal first quarter average assets grew to $4.12 billion, compared to $3.49 billiongrowth in the 2017 first quarter, an increase of 18%, primarily driven by growth in loan and securities balances.
Total loans receivable, net of allowance for loan losses, increased $393.2 million, or 36%, at December 31, 2017, compared to December 31, 2016. This increase was primarily related to growth in commercial real estate loans of $213.5 million, or 48%, growth in consumer loans of $101.8 million, or an increase of 59%, of which $56.7 million was attributable to the Company's purchased student loan portfolios and $44.0 million was related to refund advance loans, growth in commercial insurance premium finance loans of $56.2 million, or an increase of 31%, and growth in residential mortgage loans of $31.1 million, or an increase of 18%. The growth in net loans receivable from December 31, 2016 to December 31, 2017 wasportfolio, partially offset by an $11.6a reduction in consumer finance loans driven by the sale of the $81.5 million decrease, or a 12% decrease, in total agricultural loans. Excluding all purchased student loan portfoliosportfolio during the fiscal 2022 fourth quarter and refund advance loans,a reduction in warehouse finance loans. The primary drivers for the increase on a linked quarter basis was growth in both commercial finance and consumer finance loans.
•During the 2023 fiscal third quarter, the Company repurchased 490,120 shares of common stock at an average share price of $43.83.
Tax Season Recap
For the nine months ended June 30, 2023, total loans receivable, nettax services product revenue was $79.7 million, a decrease of allowance for loan losses, at December 31, 2017 were up $293.1 million, or 30%,3% compared to the same period of the prior year. At December 31, 2017, community banking loansThis was driven by a decrease in refund advance fee income partially offset by an increase in refund transfer fee income. Provision expense for refund advances increased $223.3 million, or 29%, compared to December 31, 2016.
Payments division average deposits increased $295.2 million, or 15%, for the 2018 fiscal first quarter when17% compared to the same quarter of 2017.
Non-performing assets (“NPAs”) were 0.61% of total assets at December 31, 2017, compared to 0.05% at December 31, 2016. Theprior year. This increase in NPAs was primarily relateddue to a large, well-collateralized agricultural loan relationship being more than 90 days past due,mix shift from partnerships channels to independent tax providers, which was still accruing at December 31, 2017. On January 2, 2018, a deed in lieuexpected.
Total tax services product income, net of foreclosure was executed onlosses and direct product expenses, decreased 19% to $35.3 million from $43.5 million, when comparing the collateral for this relationship upon whichfirst nine months of fiscal 2023 to the Company took ownershipsame period of the properties serving as collateral and transferred the loans to foreclosed real estate and repossessed assets. If, as expected, the properties are sold prior to the end of the agreed-upon receivership period set forth in the settlement agreement, the Company will be entitled to all principal, note interest, legal and other fees and expenses. After the receivership period ends, if the properties are not sold, the Company will be entitled to the fair value of the properties, which the Company believes to be significantly in excess of all principal, note interest, legal and other fees and expenses. At September 30, 2017, NPAs were 0.72% of total assets.fiscal year. The overall decrease in NPAs from September 30, 2017 to December 30, 2017tax services product income was primarily due to higher provision expense and the payofftwo tax partners that the Company did not renew heading into the 2023 tax season, as previously disclosed.
FINANCIAL CONDITION
At December 31, 2017,June 30, 2023, the Company’s total assets increased by $189.6$711.2 million or 4%, to $5.42$7.46 billion compared to $5.23 billion at September 30, 2017. The increase in assets was2022, primarily due to an increasegrowth of $536.6 million in total loans and leases, $127.2 million in cash and cash equivalents, and $66.3 million in loans receivable.held for sale, partially offset by a reduction of $22.8 million in other assets.
Total cash and cash equivalents were $1.30 billionwas $515.3 million at December 31, 2017, an increase of $32.8June 30, 2023, increasing from $388.0 million or 3%, from $1.27 billionat September 30, 2017. Similar to September 30, 2017, the Company also temporarily repositioned the balance sheet at the end of the 2018 fiscal first quarter to prepare for the upcoming seasonal tax lending activity.
2022. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the Federal Reserve Bank. FRB. At June 30, 2023, the Company did not have any federal funds sold.
The total of mortgage-backed securities (“MBS”) andCompany's investment securities decreased $21.1security balances increased $27.4 million, or 1%, to $2.24$1.95 billion at December 31, 2017,June 30, 2023, compared to $2.26$1.92 billion at September 30, 2017,2022, as purchases exceeded maturities sales, and principal pay downs exceeded purchases.downs. The Company’s portfolio of investment securities and MBS securitiescustomarily consists primarily of U.S. Government agency and instrumentality MBS, which have relatively short expected lives U.S. Government related asset backed securities, U.S. Government agency or instrumentality collateralized housing related municipal securities, and high qualitymuch shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, (“NBQ”), which mature in approximately 15 years or less. Ofless, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. During the total MBS, $600.1nine months ended June 30, 2023, the Company made $150.8 million were classified as availablepurchases of investment securities.
Loans held for sale and $8.5at June 30, 2023 totaled $87.4 million, were classified asincreasing from $21.1 million at September 30, 2022. This increase was primarily driven by growth in consumer credit products held to maturity. Of the total investment securities, $1.39 billion were classified as available for sale at June 30, 2023 compared to September 30, 2022.
Total gross loans and $235.0 million were classified as held to maturity. During the three month period ended December 31, 2017, the Company purchased $105.3 million of investment securities available for sale, no MBS securities, and no investment securities held to maturity, with the available for sale investment security purchases consisting primarily of Ginnie Mae (“GNMA”) convertible and collateralized municipal housing securities and other municipal housing securities fully collateralized by U.S. agency and instrumentality securities.
During the first quarter of fiscal 2018, the Company early adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Due to the early adoption of the ASU, the Company transferred $204.7 million of investment securities and $101.3 million of MBS from HTM to AFS during the first quarter of fiscal 2018. This change allows for enhanced balance sheet management and provides the opportunity for more liquidity, should it be needed.
The Company’s portfolio of net loans receivable increased $182.4 million, or 14%, to $1.50leases totaled $4.07 billion at December 31, 2017, from $1.32June 30, 2023, as compared to $3.54 billion at September 30, 2017. This2022. The primary driver for the increase was due to increases in commercial finance, consumer finance, warehouse finance, and seasonal tax services loans. See Note 5 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
Commercial finance loans, which comprised 85% of the Company's gross loan and lease portfolio, totaled $3.44 billion at June 30, 2023, reflecting an increase of $417.1 million, or 14%, from September 30, 2022.
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 was $30.9 million at June 30, 2023 and $28.8 million at September 30, 2022, as purchases were partially offset by redemptions of FHLB membership stock during the nine months ended June 30, 2023.
Total end-of-period deposits increased 8% to $6.31 billion at June 30, 2023, compared to $5.87 billion at September 30, 2022, primarily driven by an increase in noninterest-bearing deposits of $435.5 million.
As of June 30, 2023, the Company had $966.6 million in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $349.4 million are on activated cards while $617.2 million are on inactivated cards. Between July 2023 and the end of fiscal year 2024, the inactive card balances are expected to decrease by approximately $450 million as the Company actively returns unclaimed balances to the U.S. Treasury.
The Company's total borrowings increased $228.2 million from $36.0 million at September 30, 2022 to $264.2 million at June 30, 2023, primarily driven by an increase in short-term borrowings of $230.0 million partially offset by payments on long-term borrowings.
At June 30, 2023, the Company’s stockholders’ equity totaled $677.7 million, an increase of $32.6 million, from $645.1 million at September 30, 2022. The increase was primarily attributable to a $112.0change in additional paid-in capital and retained earnings. The Company and Bank remained above the federal regulatory minimum capital requirements at June 30, 2023, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See “Liquidity and Capital Resources” for further information.
Noninterest-bearing Checking Deposits. The Company may hold negative balances associated with cardholder programs in the BaaS business line that are included within noninterest-bearing deposits on the Company's Condensed Consolidated Statements 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 alignment to expected breakage values on the card. 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 a small number of partners and are analyzed on an ongoing basis.
–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 BaaS business line:
| | | | | | | | | | | |
| (Dollars in thousands) | June 30, 2023 | | September 30, 2022 |
| Noninterest-bearing deposits | $ | 6,428,523 | | | $ | 5,916,142 | |
| Prefunding | (331,834) | | | (244,462) | |
| Discount funding | (5,915) | | | (15,991) | |
| DDA overdrafts | (8,137) | | | (8,587) | |
| Noninterest-bearing checking, net | $ | 6,082,637 | | | $ | 5,647,102 | |
Custodial Off-Balance Sheet Deposits. The Bank utilizes a custodial deposit transference structure for certain prepaid and deposit programs whereby the Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a “Program Bank”). Accounts opened at Program Banks are established in the Bank’s name as custodian, for the benefit of the Bank’s cardholders. The Bank remains the issuer of all cards and holder of all accounts under the applicable cardholder agreements and has sole custodial control and transaction authority over the accounts opened at Program Banks.
The Bank maintains the records of each cardholder’s deposits maintained at Program Banks. Program Banks undergo robust due diligence prior to becoming a Program Bank and are also subject to continuous monitoring.
In return for record keeping services at Program Banks, the Bank receives a servicing fee (“Servicing Fee”). For the three and nine months ended June 30, 2023, the Company recognized $14.6 million increaseand $45.7 million, respectively, in consumer loans, largely dueservicing fee income as compared to an insignificant amount for the student loanthree and nine months ended June 30, 2022. The Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.
As of June 30, 2023, the Company managed $781.0 million of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn record keeping service fee income, typically reflective of the EFFR.
Approximately 48% of the deposit portfolio purchases and refund advance loans,was subject to these higher card processing expenses during the 2023 fiscal third quarter that are derived from the terms of contractual agreements with certain BaaS partners. These agreements are tied to a $68.5rate index, typically the EFFR.
RESULTS OF OPERATIONS
General
The Company recorded net income of $45.1 million, or 12%, increase in commercial real estate loans, a $20.8 million, or 58%, increase in commercial operating loans, and a $7.3 million, or 4%, increase in residential mortgage loans, offset in part by a $14.8 million, or 6%, decrease in commercial insurance premium finance loans and a $9.4 million, or 10%, decrease in total agricultural loans, during$1.68 per diluted share, for the three months ended December 31, 2017. Excluding the purchased student loan portfolios and refund advances, total loans receivable,June 30, 2023, compared to net income of allowance for loan losses, would have increased $72.2$22.4 million, or 6%, from September$0.76 per diluted share, for the three months ended June 30, 2017 to December 31, 2017. Community banking loans increased $61.52022. Total revenue for the fiscal 2023 third quarter was $165.2 million, or 7%, during this period. Of the $654.0 million in commercial and multi-family real estate loans at December 31, 2017, $129.9 million were considered high-volatility commercial real estate (“HVCRE”) loans. While such HVCRE loans are risk-weighted at 150% rather than 100%, as is customary for non-HVCRE commercial loans, the increase to the Company’s risk-weighted assets continues to be inconsequential in terms of the Company’s capital ratios.
Total deposits increased $290.2 million, or 9%, at December 31, 2017, to $3.51 billion from $3.22 billion at September 30, 2017, primarily related to an increase of $325.6$39.1 million, or 31%, compared to the same quarter in non-interest bearing deposits,fiscal 2022, primarily driven by an increase in both noninterest income and net interest income.
The Company recorded net income of $127.7 million, or $4.62 per diluted share, for the nine months ended June 30, 2023, compared to net income of $133.0 million, or $4.44 per diluted share, for the nine months ended June 30, 2022. Total revenue for the nine months endedJune 30, 2023 was $543.5 million, an increase of $17.1$65.6 million in interest-bearing checking deposits and a $4.6 million increase in certificates, or 31%, compared to the same period of deposit. the prior fiscal year. The increase is primarily driven by increases in total deposits wasinterest income and card and deposit fees along with the $10.0 million gain on sale of trademarks recognized during the nine months ended June 30, 2023, partially offset by a decreasethe $50.0 million gain on sale of $55.8trademarks recognized during the prior fiscal year period.
Net Interest Income
Net interest income for the third quarter of fiscal 2023 was $97.5 million, an increase of 35% from the same quarter in wholesale deposits. Depositsfiscal 2022. The increase was mainly attributable to increased yields, higher interest-earning asset balances and an improved earning asset mix. For the Payments segment increased by $331.8nine months ended June 30, 2023, the net interest income was $282.9 million, or 14%an increase of 24%, to $2.77 billion at December 31, 2017, compared to $2.44 billion at September 30, 2017. The average balance of total deposits and interest-bearing liabilities was $3.62 billion for the three month period ended December 31, 2017, compared to $3.06 billionfor the same period in the prior year. The average balance of non-interest bearing deposits for the three month period ended December 31, 2017 increased by$272.3from $227.6 million or 13%, to $2.33 billion, compared to the same period in the prior fiscal year.
Total borrowings decreased $91.1The Company’s average interest-earning assets for the third fiscal quarter increased by $244.4 million or 6%, from $1.49to $6.33 billion at September 30, 2017 to $1.40 billion at December 31, 2017,compared with the same quarter in fiscal 2022, primarily due to a decrease of federal funds purchased. At September 30, 2017growth in loans and December 31, 2017, the Company's cash balances were much higher than normal due to a temporary repositioning of the balance sheet at those dates as part of its preparations for the 2018 tax season. The Company’s overnight federal funds purchased fluctuates on a daily basis due to the nature of a portion of its non-interest bearing deposit base, primarily related to payroll processing timing with a higher volume of overnight federal funds purchased on Monday through Wednesday, which are typically paid down on Thursday and Friday. Secondarily, a portion of certain programs are pre-funded, typically in the final week of the month and the corresponding deposits are received typically on the first day of the following month causing a temporary increased need for overnight borrowings. Accordingly, our level of borrowings may fluctuate significantly on any particular quarter end date.
At December 31, 2017, the Company’s stockholders’ equity totaled $437.7 million, an increase of $3.2 million, from $434.5 million at September 30, 2017. The increase was attributable to net earningsleases and an increase in additional paid-in capital,total investment balances, partially offset by accumulated other comprehensivea decrease in cash balances. Thethird quarter average outstanding balance of loans and leases increased $171.6 million compared to the same quarter of the prior fiscal year, primarily due to an increase in commercial finance loans, partially offset by decreases in consumer finance loans, warehouse finance loans, and tax services loans.
Fiscal 2023 third quarter NIM increased to 6.18% from 4.76% in the third fiscal quarter of last year. When including contractual card processing expense, adjusted NIM would have been 4.88% in the fiscal 2023 third quarter compared to 4.62% during the fiscal 2022 third quarter. The overall reported tax equivalent yield (“TEY”) on average earning assets increased 142 basis points to 6.31% compared to the prior fiscal year quarter, primarily driven by an increase in loan and lease, investment securities, and cash yields. The yield on the loan and lease portfolio was 8.31% compared to 6.69% for the comparable period last year and the TEY on the securities portfolio was 2.96% compared to 2.14% over that same period.
For the nine months ended June 30, 2023, NIM was 5.98%, an increase of 126 basis points from 4.72% compared to the same period in the prior fiscal year. NIM, tax-equivalent for the nine months ended June 30, 2023 increased to 6.00% from 4.73% in the same period of the prior fiscal year.
The Company's cost of funds for all deposits and borrowings averaged 0.13% during the fiscal 2023 third quarter, as compared to 0.12% during the prior fiscal year quarter. The Company's overall cost of deposits was 0.01% in the fiscal third quarter of 2023, as compared to 0.01% during the prior year quarter. When including contractual card processing expense, the Company's overall cost of deposits was 1.41% in the fiscal 2023 third quarter, as compared to 0.16% during the prior year quarter.
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. The balances presented in the table below are calculated on a daily average balance. 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
| (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 and fed funds sold | $ | 248,865 | | $ | 2,441 | | 3.93 | % | | $ | 309,324 | | $ | 787 | | 1.02 | % |
| Mortgage-backed securities | 1,533,122 | | 10,234 | | 2.68 | % | | 1,395,149 | | 7,381 | | 2.12 | % |
| Tax exempt investment securities | 145,474 | | 989 | | 3.45 | % | | 173,192 | | 851 | | 2.50 | % |
| Asset-backed securities | 188,039 | | 2,120 | | 4.52 | % | | 210,815 | | 750 | | 1.43 | % |
| Other investment securities | 292,025 | | 2,320 | | 3.19 | % | | 246,218 | | 1,596 | | 2.60 | % |
| Total investments | 2,158,660 | | 15,663 | | 2.96 | % | | 2,025,374 | | 10,578 | | 2.14 | % |
| Commercial finance | 3,268,780 | | 68,174 | | 8.37 | % | | 2,949,813 | | 50,785 | | 6.91 | % |
| Consumer finance | 225,470 | | 4,665 | | 8.30 | % | | 300,352 | | 4,964 | | 6.63 | % |
| Tax services | 52,477 | | 25 | | 0.19 | % | | 62,934 | | 53 | | 0.34 | % |
| Warehouse finance | 372,498 | | 8,378 | | 9.02 | % | | 434,532 | | 6,739 | | 6.22 | % |
| Total loans and leases | 3,919,225 | | 81,242 | | 8.31 | % | | 3,747,631 | | 62,541 | | 6.69 | % |
| Total interest-earning assets | 6,326,750 | | $ | 99,346 | | 6.31 | % | | 6,082,329 | | $ | 73,906 | | 4.89 | % |
| Noninterest-earning assets | 574,840 | | | | | 695,468 | | | |
| Total assets | $ | 6,901,590 | | | | | $ | 6,777,797 | | | |
| | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| Interest-bearing checking | $ | 339 | | $ | — | | 0.22 | % | | $ | 292 | | $ | — | | 0.33 | % |
| Savings | 69,310 | | 7 | | 0.04 | % | | 82,989 | | 7 | | 0.03 | % |
| Money markets | 126,994 | | 76 | | 0.24 | % | | 101,943 | | 53 | | 0.21 | % |
| Time deposits | 6,224 | | 3 | | 0.19 | % | | 8,709 | | 9 | | 0.40 | % |
| Wholesale deposits | 5,794 | | 78 | | 5.38 | % | | 8,554 | | 25 | | 1.19 | % |
| Total interest-bearing deposits | 208,661 | | 164 | | 0.32 | % | | 202,487 | | 94 | | 0.19 | % |
| Overnight fed funds purchased | 78,320 | | 1,057 | | 5.42 | % | | 19,353 | | 72 | | 1.50 | % |
| | | | | | | |
| Subordinated debentures | 19,549 | | 355 | | 7.28 | % | | 36,480 | | 1,444 | | 15.87 | % |
| Other borrowings | 14,850 | | 305 | | 8.24 | % | | 17,056 | | 145 | | 3.40 | % |
| Total borrowings | 112,719 | | 1,717 | | 6.11 | % | | 72,889 | | 1,661 | | 9.14 | % |
| Total interest-bearing liabilities | 321,380 | | 1,881 | | 2.35 | % | | 275,376 | | 1,755 | | 2.56 | % |
| Noninterest-bearing deposits | 5,686,581 | | — | | — | % | | 5,538,585 | | — | | — | % |
| Total deposits and interest-bearing liabilities | 6,007,961 | | $ | 1,881 | | 0.13 | % | | 5,813,961 | | $ | 1,755 | | 0.12 | % |
| Other noninterest-bearing liabilities | 206,708 | | | | | 213,293 | | | |
| Total liabilities | 6,214,669 | | | | | 6,027,254 | | | |
| Shareholders' equity | 686,921 | | | | | 750,543 | | | |
| Total liabilities and shareholders' equity | $ | 6,901,590 | | | | | $ | 6,777,797 | | | |
| Net interest income and net interest rate spread including noninterest-bearing deposits | | $ | 97,465 | | 6.19 | % | | | $ | 72,151 | | 4.77 | % |
| | | | | | | |
| Net interest margin | | | 6.18 | % | | | | 4.76 | % |
| Tax-equivalent effect | | | 0.02 | % | | | | 0.01 | % |
Net interest margin, tax-equivalent(2) | | | 6.20 | % | | | | 4.77 | % |
(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2023 and 2022 was 21%. |
(2) 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. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, |
| 2023 | | 2022 |
| (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 and fed funds sold | $ | 345,268 | | $ | 10,000 | | 3.87 | % | | $ | 570,806 | | $ | 2,067 | | 0.48 | % |
| Mortgage-backed securities | 1,551,208 | | 30,972 | | 2.67 | % | | 1,194,869 | | 16,690 | | 1.87 | % |
| Tax exempt investment securities | 150,065 | | 2,959 | | 3.34 | % | | 190,076 | | 2,575 | | 2.29 | % |
| Asset-backed securities | 162,049 | | 4,541 | | 3.75 | % | | 323,080 | | 3,045 | | 1.26 | % |
| Other investment securities | 297,278 | | 7,104 | | 3.19 | % | | 269,561 | | 4,482 | | 2.22 | % |
| Total investments | 2,160,600 | | 45,576 | | 2.87 | % | | 1,977,586 | | 26,792 | | 1.86 | % |
| Commercial finance | 3,111,814 | | 187,038 | | 8.04 | % | | 2,858,837 | | 148,678 | | 6.95 | % |
| Consumer finance | 203,928 | | 15,279 | | 10.02 | % | | 315,933 | | 18,970 | | 8.03 | % |
| Tax services | 173,905 | | 10,637 | | 8.18 | % | | 228,181 | | 13,126 | | 7.69 | % |
| Warehouse finance | 327,982 | | 20,563 | | 8.38 | % | | 448,358 | | 20,816 | | 6.21 | % |
| Community banking | — | | — | | — | % | | 46,471 | | 1,525 | | 4.39 | % |
| Total loans and leases | 3,817,629 | | 233,517 | | 8.18 | % | | 3,897,780 | | 203,115 | | 6.97 | % |
| Total interest-earning assets | 6,323,497 | | $ | 289,093 | | 6.13 | % | | 6,446,172 | | $ | 231,974 | | 4.83 | % |
| Noninterest-earning assets | 592,064 | | | | | 783,251 | | | |
| Total assets | $ | 6,915,561 | | | | | $ | 7,229,423 | | | |
| | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| Interest-bearing checking | $ | 352 | | $ | 1 | | 0.29 | % | | $ | 324 | | $ | 1 | | 0.32 | % |
| Savings | 67,287 | | 19 | | 0.04 | % | | 82,211 | | 18 | | 0.03 | % |
| Money markets | 130,403 | | 225 | | 0.23 | % | | 93,262 | | 157 | | 0.23 | % |
| Time deposits | 6,791 | | 7 | | 0.14 | % | | 8,670 | | 34 | | 0.52 | % |
| Wholesale deposits | 65,314 | | 2,150 | | 0.41 | % | | 82,754 | | 190 | | 0.23 | % |
| Total interest-bearing deposits | 270,147 | | 2,402 | | 1.19 | % | | 267,221 | | 400 | | 0.20 | % |
| Overnight fed funds purchased | 49,865 | | 1,845 | | 4.95 | % | | 38,111 | | 135 | | 0.47 | % |
| | | | | | | |
| Subordinated debentures | 19,555 | | 1,065 | | 7.28 | % | | 61,505 | | 3,432 | | 7.46 | % |
| Other borrowings | 15,319 | | 854 | | 7.46 | % | | 17,857 | | 443 | | 3.32 | % |
| Total borrowings | 84,739 | | 3,764 | | 5.94 | % | | 117,473 | | 4,010 | | 4.56 | % |
| Total interest-bearing liabilities | 354,886 | | 6,166 | | 2.32 | % | | 384,694 | | 4,410 | | 1.53 | % |
| Noninterest-bearing deposits | 5,699,937 | | — | | — | % | | 5,843,962 | | — | | — | % |
| Total deposits and interest-bearing liabilities | 6,054,823 | | $ | 6,166 | | 0.14 | % | | 6,228,656 | | $ | 4,410 | | 0.10 | % |
| Other noninterest-bearing liabilities | 192,240 | | | | | 203,283 | | | |
| Total liabilities | 6,247,063 | | | | | 6,431,939 | | | |
| Shareholders' equity | 668,498 | | | | | 797,484 | | | |
| Total liabilities and shareholders' equity | $ | 6,915,561 | | | | | $ | 7,229,423 | | | |
| Net interest income and net interest rate spread including noninterest-bearing deposits | | $ | 282,927 | | 5.99 | % | | | $ | 227,564 | | 4.73 | % |
| | | | | | | |
| Net interest margin | | | 5.98 | % | | | | 4.72 | % |
| Tax-equivalent effect | | | 0.02 | % | | | | 0.01 | % |
Net interest margin, tax-equivalent(2) | | | 6.00 | % | | | | 4.73 | % |
(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2023 and 2022 was 21%.
(2) 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.
Provision for Credit Losses
The Company recognized a provision for credit losses of $1.8 million and $48.3 million for the three and nine months ended June 30, 2023, compared to a reversal of provision for credit losses expense of $1.3 million and a provision of $31.2 million for the comparable periods in the prior fiscal year. The increase in provision for credit losses during the current quarter compared to the prior fiscal year period was primarily driven by increases in the commercial finance portfolio. Net charge-offs were $4.2 millionfor the quarter ended June 30, 2023, compared to $12.2 million for the quarter ended June 30, 2022. Net charge-offs attributable to the commercial finance and consumer finance portfolios for the current quarter were $2.6 million and $1.9 million, respectively, while a recovery of $0.3 million was recognized in the tax services portfolio.
Noninterest Income
Fiscal 2023 third quarter noninterest income increased to $67.7 million, compared to $54.0 million for the same period of the prior fiscal year. The increase was primarily attributable to increases in card and deposit fees, rental income, and cash dividends paid. At December 31, 2017,other income. The period-over-period increase was partially offset by a reduction in tax services fee income.
The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $14.6 million during the Bank continued2023 fiscal third quarter, as compared to exceed all regulatory requirements for classification as a well‑capitalized institution. See “Liquidity and Capital Resources” for further information.
Non-performing Assets and Allowance for Loan Losses
Generally,$18.2 million for the majorityfiscal quarter ended March 31, 2023 and $0.5 million for the fiscal quarter ended June 30, 2022.
Noninterest income for the nine months ended June 30, 2023 increased to $260.5 million from $250.4 million for the same period of loan segments,the prior fiscal year.
Noninterest Expense
Noninterest expense increased 19% to $114.6 million for the fiscal 2023 third quarter, from $96.7 million for the same quarter last year. The increase was primarily attributable to increases in compensation expense, card processing expense, operating lease equipment depreciation, impairment expense, and other expense. The period-over-period increase was partially offset by a decrease in legal and consulting expense and tax services expense. During the third quarter of fiscal year 2023, the Company recognized $2.7 million of impairment expense related to its Pathward Venture Capital business.
The card processing expense increase was due to structured agreements with BaaS partners. The amount of expense paid under those agreements is based on an agreed upon rate index that varies depending on the deposit levels, floor rates, market conditions, and other performance conditions. Generally, this rate index averages between 50% to 85% of the EFFR and reprices immediately upon a change in the EFFR. Approximately 48% of the deposit portfolio was subject to these higher card processing expenses during the 2023 fiscal third quarter. For the fiscal quarter ended June 30, 2023, card processing expenses related to these structured agreements were $20.5 million, as compared to $20.4 million for the fiscal quarter ended March 31, 2023 and $2.2 million for the fiscal quarter ended June 30, 2022.
Noninterest expense for the nine months ended June 30, 2023 increased to $346.8 million from $282.2 million for the same period of the prior fiscal year.
Income Tax Expense
The Company recorded an income tax expense of $3.2 million, representing an effective tax rate of 6.6%, for the fiscal 2023 third quarter, compared to income tax expense of $7.0 million, representing an effective tax rate of 22.6%, for the third quarter last fiscal year. The current quarter decrease in income tax expense was primarily due to an increase in investment tax credits recognized ratably when compared to the prior year quarter.
The Company originated $21.4 million in renewable energy leases during the fiscal 2023 third quarter, resulting in $5.8 million in total net investment tax credits. During the third quarter of fiscal 2022, the Company originated $4.4 million in renewable energy leases resulting in $1.0 million in total net investment tax credits. Investment tax credits related to renewable energy leases are recognized ratably based on income throughout each fiscal year. For the nine months ended June 30, 2023, the Company originated $50.9 million in renewable energy leases, compared to $26.9 million for the comparable prior year period. The timing and impact of future renewable energy tax credits are expected to vary from period to period, and the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
Asset Quality
Generally, when a loan or lease becomes delinquent 90 days or more (210 days or more for commercial insurance premium finance loans), or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrualnonaccrual 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 inon a non-accrual status until six months of good payment history has been established or management believes the loan becomes currentfinancial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and has demonstrated a sustained periodstill accruing. The Company considers these relationships as being in the process of satisfactory performance, typically after six months.
Consumercollection. Insurance premium finance loans, consumer finance and tax advanceservices loans originated through the Company's tax divisions, are interest and fee free to the consumer. Due to the nature of consumer advance loans, it typically takes no more than three e-file cycles, the period of time between scheduled IRS payments, fromgenerally not placed on nonaccrual status but are instead written off when the return is accepted to collect. In the eventcollection of default, MetaBank has no recourse with the tax consumer. Generally, when the refund advance loan becomes delinquent for 180 daysprincipal and interest become doubtful.
Loans and leases, or more, orportions thereof, are charged-off when collection of principal becomes doubtful, the Company willdoubtful. 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 loan balance.end of June and refund advance loans if such loans have not been collected by the end of the calendar year. Nonaccrual loans and troubled debt restructurings are generally considered impaired.
The Company believes that the level of allowance for loancredit losses at December 31, 2017June 30, 2023 was appropriate and reflected probable losses related to these loans;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 LoanCredit Losses” below.for further information.
The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.Company's nonperforming assets.
| | | | | | | | | | | |
| (Dollars in thousands) | June 30, 2023 | | September 30, 2022 |
| Nonperforming Loans and Leases | | | |
| Nonaccruing loans and leases: | | | |
| Commercial finance | $ | 30,170 | | | $ | 13,375 | |
| | | |
| | | |
| | | |
| Total nonaccruing loans and leases | 30,170 | | | 13,375 | |
| | | |
| Accruing loans and leases delinquent 90 days or more: | | | |
| | | |
| | | |
| Commercial finance | 6,542 | | | 4,142 | |
| Consumer finance | 2,087 | | | 2,793 | |
Tax services(1) | — | | | 8,873 | |
| | | |
| | | |
| Total accruing loans and leases delinquent 90 days or more | 8,629 | | | 15,808 | |
| Total nonperforming loans and leases | 38,799 | | | 29,183 | |
| | | |
| Other Assets | | | |
| Nonperforming operating leases | 1,981 | | | 1,736 | |
| | | |
| Foreclosed and repossessed assets: | | | |
| Commercial finance | — | | | 1 | |
| | | |
| Total foreclosed and repossessed assets | — | | | 1 | |
| | | |
| Total other assets | 1,981 | | | 1,737 | |
| Total nonperforming assets | $ | 40,780 | | | $ | 30,920 | |
| Total as a percentage of total assets | 0.55 | % | | 0.46 | % |
(1) Certain tax services loans do not bear interest. | | | |
|
| | | | | | | |
| | Non-Performing Assets As Of |
| | December 31, 2017 | | September 30, 2017 |
| Non-Performing Loans | (Dollars in Thousands) |
| | | | |
| Non-Accruing Loans: | | | |
| Commercial and Multi-Family Real Estate | 284 |
| | 685 |
|
Total (1) | 284 |
| | 685 |
|
| | | | |
| Accruing Loans Delinquent 90 Days or More | |
| | |
|
| 1-4 Family Real Estate | 234 |
| | — |
|
| Agricultural Real Estate | 27,818 |
| | 34,198 |
|
| Consumer | 1,624 |
| | 1,406 |
|
| Agricultural Operating | — |
| | 97 |
|
| CML Insurance Premium Finance | 3,194 |
| | 1,205 |
|
| Total | 32,870 |
| | 36,906 |
|
| | | | |
| Total Non-Performing Loans | 33,154 |
| | 37,591 |
|
| | | | |
| Other Assets | | | |
| Foreclosed Assets: | | | |
| 1-4 Family Real Estate | — |
| | 62 |
|
| Commercial and Multi-Family Real Estate | 128 |
| | 230 |
|
| Total | 128 |
|
| 292 |
|
| | | | |
| Total Other Assets | $ | 128 |
|
| $ | 292 |
|
| | | | |
| Total Non-Performing Assets | $ | 33,282 |
|
| $ | 37,883 |
|
| Total as a Percentage of Total Assets | 0.61 | % | | 0.72 | % |
Total Non-Performing Assets as a Percentage of Total Assets - excluding insured loans(2) | 0.58 | % | | 0.70 | % |
(1) During the three-month period ended December 31, 2017, the Company had $1.1 million ofThe Company's nonperforming loans modified as troubled debt restructurings ("TDRs") and no loans modified as TDRs during the three-month period ended Septemberleases at June 30, 2017. In addition, the Company had $1.6 million and $0.5 million of TDRs performing in accordance with their terms at each of the periods ended December 31, 2017 and September 30, 2017.
(2)Excludes from non-performing assets the student loans that are insured by ReliaMax Surety Company.
At December 31, 2017, non-performing loans totaled $33.22023 were $38.8 million, representing 2.19%0.93% of total gross loans and leases, compared to $37.6$29.2 million, or 2.83%0.82% of total gross loans and leases at September 30, 2017. This decrease2022. The increase in non-performing loansthe nonperforming assets as a percentage of total assets at June 30, 2023 compared to September 30, 2022, was primarily due todriven by an increase nonperforming loans in the payoffcommercial finance portfolio.
Classified Assets. Federal regulations provide for the classification of certain loans, leases, and other assets such as debt and equity securities considered by ourthe Bank's primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss.“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-offcharge 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, 2017,June 30, 2023, the Company had classified $40.4loans and leases of $189.7 million of its assets as substandard, and did not classify any assets$13.8 million as doubtful orand none as loss. At September 30, 2017,2022, the Company classified $40.6loans and leases of $203.7 million of its assets as substandard, and did not classify any assets$4.0 million as doubtful orand none as loss.
Allowance for LoanCredit Losses. The allowanceACL 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, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan lossescommitments is established throughrecorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.
Individually evaluated loans and leases are a provision for loan losseskey component of the ACL. Generally, the Company measures credit loss on individually evaluated loans based on management’s evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, involves consideration of, among other matters, the estimated fair value of the underlying collateral economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an appropriate loan loss allowance.
Management closely monitors economic developments both regionally and nationwide, andless estimated selling costs, as the Company considers these factors when assessingfinancial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, credit loss is measured at the appropriatenesspresent value of its allowance forexpected future cash flows discounted at the loan losses. or lease initial effective interest rate.
The current economic environment continues to show signs of improvement in the Bank’s markets. The Bank’s average loss rates over the past three years for community banking loans were relatively lowCompany's ACL totaled $81.9 million at June 30, 2023, an increase compared to peers, but were offset with a higher agricultural loss rate in fiscal year 2016 driven by the charge off of one relationship. The Bank does not believe it is likely that these low loss conditions will continue indefinitely. Although the Bank’s four market areas have indirectly benefited from a stable agricultural market, the market has become slightly stressed as commodity prices have generally remained lower than a few years ago. Management believes the low commodity prices and adverse weather conditions have the potential to negatively impact the economies of our agricultural markets. The improving economic conditions have also kept the loss rates on the national lending loans as well as the tax service loans relatively low, although management realizes that these low loss conditions may not continue.
At December 31, 2017, the Company had established an allowance for loan losses totaling $8.9 million, compared to $7.5$45.9 million at September 30, 2017. This2022. The increase in the ACL at June 30, 2023, when compared to September 30, 2022, was primarily due to a $33.1 million increase in the additional provision expense related to loans originated by ourseasonal tax services divisions. Duringloan portfolio and a $2.4 million increase in the three months ended Decembercommercial finance portfolio.
The following table presents the Company's ACL as a percentage of its total loans and leases.
| | | | | | | | | | | | | | | | | |
| As of the Period Ended |
| June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 |
| Commercial finance | 1.35 | % | 1.53 | % | 1.62 | % | 1.46 | % | 1.56 | % |
| Consumer finance | 0.92 | % | 1.99 | % | 1.54 | % | 0.86 | % | 2.44 | % |
| Tax services | 70.20 | % | 53.77 | % | 2.01 | % | 0.05 | % | 54.29 | % |
| Warehouse finance | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % |
| Total loans and leases | 2.01 | % | 2.27 | % | 1.50 | % | 1.30 | % | 2.04 | % |
| Total loans and leases excluding tax services | 1.21 | % | 1.40 | % | 1.50 | % | 1.30 | % | 1.44 | % |
The Company's ACL as a percentage of total loans and leases decreased to 2.01% at June 30, 2023 from 2.27% at March 31, 2017,2023 and increased from 1.30% at September 30, 2022. The decrease in the Company recorded a provision for loan losses of $1.1 million,total loans and leases coverage ratio at June 30, 2023 compared to March 31, 2023 was primarily driven by the commercial finance and consumer finance portfolios, partially offset by $0.3 million of net recoveries,an increase in the seasonal tax services portfolio. The decrease in the consumer finance was related to seasonal activity. The increase in the total loans and leases coverage ratio at June 30, 2023 when compared to $0.1 millionof net charge offs forSeptember 30, 2022 was primarily driven by the three months ended December 31, 2016. Management believes that, based on a detailed review of the loan portfolio, historic loan losses, current economic conditions, the size of the loan portfolio, and other factors, the level ofseasonal tax services portfolio. The year-over-year increase in the allowance for loan losses at December 31, 2017 reflectedrelated to the seasonal tax services portfolio was primarily attributable to prior year charge-off activity related to a partner the Company did not renew after the 2022 tax season. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate allowance against probable losses from the loan portfolio. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan losses will not be required in future periods.supportable level.
The allowance for loan losses reflects management’s best estimate of probable losses inherent in the portfolio based on currently available information. In addition to the factors mentioned above, future additions to the allowance for loan losses may become necessary based upon changing economic conditions, increased loan balances or changes in the underlying collateral of the loan portfolio. In addition, our regulators have the ability to order us to increase our allowance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s financial statements are prepared in accordance with U.S. 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 policies described below as Critical Accounting Policies.portrayal of our financial condition and results of operations. 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. ThisA discussion and analysis should be read in conjunction withof the Company’s financial statementscritical accounting policies and estimates can be found in the accompanying notes presented in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” of itsCompany's Annual Report on Form 10-K for the year ended September 30, 2017, and information contained herein.
Allowance for Loan Losses. The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values,2022. There were no significant changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loanthese critical accounting policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Although management believes the levels of the allowance at both December 31, 2017 and September 30, 2017 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions or other factors could result in losses in excess of the applicable allowance.
Goodwill and Intangible Assets. Each quarter, the Company evaluates the estimated useful lives of its amortizable intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In accordance with ASC 350, Intangibles – Goodwill and Other, recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
In addition, goodwill and intangible assets are tested annually as of our fiscal year end for impairment or more often if conditions indicate a possible impairment. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate future cash flows, risk-adjusted discount rates, future economic and market conditions, comparison of the Company’s market value to book value and determination of appropriate market comparables. Actual future results may differ from those estimates.
Assumptions and estimates about future values and remaining useful lives of the Company’s intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.
Customer relationship, trademark, and non-compete intangibles are amortized over the periods in which the asset is expected to meaningfully contribute to the business as a whole, using either the present value of excess earnings or straight line amortization, depending on the nature of the intangible asset. Patents are estimated to have a useful life of 20 years, beginning on the date the patent application is originally filed. Thus, patents are amortized based on the remaining useful life once granted. Periodically, the Company reviews the intangible assets for events or circumstances that may indicate a change in recoverability of the underlying basis.
Deferred Tax Assets. The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to income for the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized subject to management’s judgment that realization is more-likely-than-not. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance.
Security Impairment. Management monitors the investment securities portfolio for impairment on a security by security basis. Management has a process in place to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the Company recognizes an other-than-temporary impairment in earnings for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in earnings, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.
The amount of the credit loss component of a debt security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset- backed or floating rate security. Cash flow estimates for trust preferred securities are derived from scenario-based outcomes of forecasted default rates, loss severity, prepayment speeds and structural support.
Level 3 Fair Value Measurement. U.S. GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. Although management believes that it uses a best estimate of information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with U.S. GAAP.
RESULTS OF OPERATIONS
General. The Company recorded net income of $4.7 million, or $0.48 per diluted share, for the three months ended December 31, 2017, compared to net income of $1.2 million, or $0.14 per diluted share, for the three months ended December 31, 2016. Included in the 2018 fiscal first quarter net income was an income tax expense of $3.6 million from a reduction in the value of certain deferred tax assets as a result of the Tax Act signed into law on December 22, 2017 (see non-interest expense section for further discussion). The 2018 fiscal first quarter pre-tax results included a $1.0 million loss on sale of investments and $1.3 million of acquisition expenses. The 2018 fiscal first quarter pre-tax results also included $1.7 million in amortization of intangible assets and $1.3 million in non-cash stock-related compensation associated with executive officer employment agreements. Total revenue for the fiscal 2018 first quarter was $55.5 million, compared to $39.2 million for the same quarter in fiscal 2017, an increase of $16.3 million, or 42%, primarily due to an increase in interest from commercial insurance premium finance and community banking loans, card fee income, as well as the student loan purchases and income from tax-exempt securities (included in other investment securities), and growth in tax product fee income.
Seasonality. In the industries for electronic payments processing and tax refund processing, companies commonly experience seasonal fluctuations in revenue. For example, in recent years, the Company's results of operations for the first half of each fiscal year have been favorably affected by large numbers of taxpayers electing to receive their tax refunds via direct deposit on our pre-paid cards, which caused their operating revenues to be typically higher in the first half of those years than they were in the corresponding second half of those years. Meta's tax business is expected to continue to generate the vast majority of its revenues in the Company's fiscal second quarter, with some additional revenues in the third quarter, while most expenses are spread throughout the year with some elevated expenses in the December and March quarters. Management expects the Company's revenue to continue to be based on seasonal factors that affect the electronic payments processing and tax refund processing industries as a whole. The Company and its tax preparation partners rely on the Internal Revenue Service (the “IRS”), technology, and employees when processing and preparing tax refunds and tax-related products and services.
Net Interest Income. Net interest income for the fiscal 2018 first quarter increased by $6.4 million, or 32%, to $26.2 million from $19.8 million for the same quarter in 2017, primarily due to significant increases in the community banking loan portfolio, commercial insurance premium finance loan portfolio, and the purchased student loan portfolios. Growth in investment security balances also contributed to the increase in net interest income. Additionally, the overall increase was driven by a better mix and higher percentage of loans as a percentage of interest-earning assets, with loan yields driving a sizable increase due in part to the recently acquired student loan portfolios and their floating rate yields. The quarterly average outstanding balance of loans from all sources as a percentage of interest-earning assets increased from 30% as of the end of the first fiscal quarter of 2017 to 37% as of the end of the first fiscal quarter of 2018. In addition, lower-yielding agency Mortgage-Backed Securities ("MBS") decreased from 21% of interest-earning assets in the fiscal first quarter of 2017 compared to 18% of interest-earning assets for the same quarter in 2018. Net interest income for the fiscal 2018 first quarter was up $1.7 million from the Company's fiscal 2017 fourth quarter, as anticipated, primarily due to a better mix of earning assets.
Net interest margin, tax equivalent (“NIM”) increased from 2.90% in the fiscal 2017 first quarter to 3.06% in the fiscal 2018 first quarter. The reported 3.06% NIM reflects the lowered corporate prorated tax rate on the Company's tax-exempt municipal portfolio. Had corporate tax rates remained at previous rates, excluding changes resulting from the Tax Act, the reported NIM of 3.06% would have been 3.26%. The reported NIM of 3.06% was also impacted by 16 basis points due to tax service loans and wholesale deposits.
The overall reported tax equivalent yield (“TEY”) on average earning asset yields increased by 31 basis points to 3.55% when comparing the fiscal 2018 first quarter to the 2017 first quarter, which was driven primarily by the Company's improved earning asset mix, with increased exposure to its high-quality commercial insurance premium finance, student, and community banking loan portfolios. The increase in TEY continues to highlight the beneficial tailwind provided by this rotation among earning assets. The reported 3.55% TEY on earning assets reflects the lowered corporate prorated tax rate on the Company's tax-exempt municipal portfolio. Had corporate tax rates remained at previous rates, excluding changes resulting from the adoption of the Tax Act, reported TEY on earning assets would have been 3.75%.
The fiscal 2018 first quarter TEY on the securities portfolio increased by one basis point compared to the prior year fiscal first quarter, primarily due to the continued shift in new investments being made in higher-yielding investment securities, primarily mortgage-related, tax-exempt municipal securities rather than traditional agency MBS securities. The TEY on the securities portfolio of 2.93% for the first fiscal quarter of 2018 reflects the lowered corporate prorated tax rate on the Company's tax-exempt municipal portfolio. Had corporate tax rates remained at previous rates, excluding changes resulting from the adoption of the Tax Act, reported securities portfolio yield would have been 3.25%.
The Company’s average interest-earning assets for the fiscal 2018 first quarter increased by $539.4 million, or 17%, to $3.76 billion, up from $3.22 billion during the same quarter of the last fiscal year, primarily from growth in loan portfolios and tax-exempt investments securities, of $436.8 million and $236.3 million, respectively.
The Company’s average total deposits and interest-bearing liabilities for the 2018 first fiscal quarter increased $556.7 million, or 18%, to $3.62 billion from $3.06 billion for the same quarter of the prior fiscal year. This increase was primarily due to an increase in non-interest-bearing deposits of $272.3 million, an increase in Federal Home Loan Bank advances of $248.9 million and an increase in wholesale deposits of $126.7 million, offset by a decrease in federal funds purchased of $132.1 million. Average quarterly deposits in the Payments segment increased in the fiscal 2018 first quarter by $295.2 million, or 15%, from the same period last year.
Overall, the Company's cost of funds for all deposits and borrowings averaged 0.51% during the fiscal 2018 first quarter, compared to 0.36% for the 2017 first quarter. This increase was primarily due to increases in wholesale deposits, overnight borrowing rates and higher average overall funding balances due to the Company's utilization of more of its capital during non-tax season with higher investment balances and funding, and in preparation to hold more tax loans on the balance sheet. Notwithstanding this increase, the Company believes that its growing, low-cost deposit base gives it a distinct and significant competitive advantage over most banks, and even more so if interest rates continue to rise, because the Company anticipates that its cost of deposits will likely remain relatively low, increasing less than at many other banks. At December 31, 2017 and 2016, low-cost checking deposits represented 83% and 70% of total deposits, respectively.
The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax equivalent adjustments have been made in yield on interest bearing assets and net interest margin. Non-accruing loans have been included in the table as loans carrying a zero yield.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | 2017 | | 2016 |
(Dollars in Thousands)
| Average
Outstanding
Balance | | Interest
Earned /
Paid | | Yield /
Rate (1) | | Average
Outstanding
Balance | | Interest
Earned /
Paid | | Yield /
Rate(2) |
| Interest-earning assets: | | | | | | | | | | | |
| Cash & fed funds sold | $ | 100,321 |
| | $ | 607 |
| | 2.40 | % | | $ | 186,565 |
| | $ | 391 |
| | 0.83 | % |
| Mortgage-backed securities | 673,411 |
| | 3,758 |
| | 2.21 | % | | 689,617 |
| | 3,320 |
| | 1.91 | % |
| Tax exempt investment securities | 1,408,552 |
| | 8,698 |
| | 3.25 | % | | 1,172,252 |
| | 6,902 |
| | 3.59 | % |
| Asset-backed securities | 93,631 |
| | 765 |
| | 3.24 | % | | 117,928 |
| | 695 |
| | 2.34 | % |
| Other investment securities | 80,035 |
| | 586 |
| | 2.91 | % | | 87,029 |
| | 589 |
| | 2.69 | % |
| Total investments | 2,255,629 |
| | 13,807 |
| | 2.93 | % | | 2,066,826 |
| | 11,506 |
| | 2.92 | % |
Community banking loans(3) | 958,222 |
| | 10,466 |
| | 4.33 | % | | 762,559 |
| | 8,169 |
| | 4.25 | % |
| Tax services loans | 12,378 |
| | — |
| | — | % | | 5,573 |
| | — |
| | — | % |
| Commercial insurance premium finance loans | 244,380 |
| | 2,799 |
| | 4.54 | % | | 181,422 |
| | 2,078 |
| | 4.54 | % |
| Student loans and other | 191,510 |
| | 3,178 |
| | 6.58 | % | | 20,129 |
| | 431 |
| | 8.50 | % |
National lending loans(4) | 435,891 |
| | 5,977 |
| | 5.44 | % | | 201,551 |
| | 2,509 |
| | 4.94 | % |
| Total loans | 1,406,490 |
| | 16,443 |
| | 4.64 | % | | 969,684 |
| | 10,678 |
| | 4.37 | % |
| Total interest-earning assets | $ | 3,762,441 |
| | $ | 30,857 |
| | 3.55 | % | | $ | 3,223,075 |
| | $ | 22,575 |
| | 3.24 | % |
| Non-interest-earning assets | 360,508 |
| | | | | | 267,947 |
| | | | |
| Total assets | $ | 4,122,949 |
| | | | | | $ | 3,491,022 |
| | | | |
| | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Interest-bearing checking | $ | 71,448 |
| | $ | 50 |
| | 0.28 | % | | $ | 38,229 |
| | $ | 39 |
| | 0.40 | % |
| Savings | 53,084 |
| | 8 |
| | 0.06 | % | | 50,528 |
| | 7 |
| | 0.06 | % |
| Money markets | 47,899 |
| | 27 |
| | 0.22 | % | | 47,605 |
| | 21 |
| | 0.18 | % |
| Time deposits | 128,496 |
| | 366 |
| | 1.13 | % | | 131,169 |
| | 259 |
| | 0.78 | % |
| Wholesale deposits | 483,878 |
| | 1,434 |
| | 1.18 | % | | 357,224 |
| | 612 |
| | 0.68 | % |
| Total interest-bearing deposits | 784,805 |
| | 1,885 |
| | 0.95 | % | | 624,755 |
| | 938 |
| | 0.60 | % |
| Overnight fed funds purchased | 139,152 |
| | 525 |
| | 1.50 | % | | 271,272 |
| | 392 |
| | 0.57 | % |
| FHLB advances | 268,913 |
| | 937 |
| | 1.38 | % | | 20,043 |
| | 141 |
| | 2.80 | % |
| Subordinated debentures | 73,359 |
| | 1,113 |
| | 6.02 | % | | 73,223 |
| | 1,111 |
| | 6.02 | % |
| Other borrowings | 22,982 |
| | 201 |
| | 3.47 | % | | 15,580 |
| | 160 |
| | 4.06 | % |
| Total borrowings | 504,406 |
| | 2,776 |
| | 2.18 | % | | 380,118 |
| | 1,804 |
| | 1.88 | % |
| Total interest-bearing liabilities | 1,289,211 |
| | 4,661 |
| | 1.43 | % | | 1,004,873 |
| | 2,742 |
| | 1.08 | % |
| Non-Interest Bearing Deposits | 2,328,159 |
| | — |
| | — | % | | 2,055,842 |
| | — |
| | — | % |
| Total deposits and interest-bearing liabilities | $ | 3,617,370 |
| | $ | 4,661 |
| | 0.51 | % | | $ | 3,060,715 |
| | $ | 2,742 |
| | 0.36 | % |
| Other non-interest bearing liabilities | 71,398 |
| | | | | | 78,219 |
| | | | |
| Total liabilities | 3,688,768 |
| | | | | | 3,138,934 |
| | | | |
| Shareholders' equity | 434,181 |
| | | | | | 352,088 |
| | | | |
| Total liabilities and shareholders' equity | $ | 4,122,949 |
| | | | | | $ | 3,491,022 |
| | | | |
| Net interest income and net interest rate spread including non-interest bearing deposits | | | $ | 26,196 |
| | 3.04 | % | | | | $ | 19,833 |
| | 2.88 | % |
| | | | | | | | | | | | |
| Net interest margin | | | | | 2.76 | % | | | | | | 2.44 | % |
Net interest margin, tax equivalent(5) | | | | | 3.06 | % | | | | | | 2.90 | % |
(1) Tax rate used to arrive at the TEY for the three months ended December 31, 2017 was 24.53%
(2) Tax rate used to arrive at the TEY for the three months ended December 31, 2016 was 35%
(3) Previously stated Retail Bank loans have been renamed as Community Banking Loans
(4) Previously stated Specialty Finance Loans have been renamed as National Lending Loans
(5) Net interest margin expressed on a fully taxable equivalent basis ("Net interest margin, tax equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.Provision for Loan Losses. The Company recorded a $1.1 million provision for loan losses in the three month period ended December 31, 2017, as compared to a $0.8 million provision for loan losses in the three month period ended December 31, 2016. The provision during the three months ended December 31, 2017 was primarily due to the additional provision expense related to tax services loans as well as growth in the loan portfolio. See Note 3 to the Condensed Consolidated Financial Statements.
Non-Interest Income. Non-interest income for the fiscal 2018 first quarter increased by $10.0 million, or 51%, to $29.3 million from $19.3 million for the same period in the prior fiscal year. This increase was largely due to increases in card fee income of $6.8 million, or 37%, and tax product fee income of $1.5 million, or 242%. The increase in card fee income was primarily driven by residual fees related to wind-downs from two of our non-strategic programs. The increase in tax product fee income was primarily due to the volume of pre-season tax advance loans originated during the first quarternine months of fiscal 2018 compared to the first quarter of fiscal 2017. All of these loans are also being held during fiscal 2018, as opposed to the previous year when many of these loans were sold, which also contributed to the increase.2023.
Non-Interest Expense. Non-interest expense increased $7.3 million, or 20%, to $44.0 million, for the first quarter of fiscal year 2018, as compared to $36.8 million for the same period in 2017.This increase was largely caused by a $4.5 million increase in compensation expense, a $1.0 million increase in card processing expense and a $0.9 million increase in occupancy and equipment. The increase in compensation expense was primarily due to a full quarter of expenses related to the EPS and SCS acquisitions, both of which closed during the first quarter of fiscal 2017, along with increased staffing to support the Company's growing business initiatives. The integration of EPS and SCS allowed the Company to gain scale in the tax services divisions during fiscal 2017 and the Company expects to gain further efficiencies during fiscal 2018.
Income Tax. Income tax expense for the fiscal 2018 first quarter was $5.7 million, resulting in an effective tax rate of 54.9%, compared to $0.3 million, or an effective tax rate of 21.6%, for the 2017 fiscal first quarter. The increase in the effective tax rate is primarily due to a non-recurring income tax expense of approximately $3.6 million from a reduction in the value of certain deferred tax assets as a result of the Tax Act. The Company will continue to analyze the financial impact of the Tax Act. As the Company’s fiscal year end falls on September 30, the statutory corporate rate for fiscal 2018 will be prorated to 24.53%.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser extent through its Community Banking divisionBaaS business line, borrowings, principal and interest payments on loans and leases 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 depositsdeposit and loan commitments, to maintain liquidity, and to meet operating expenses.
At December 31, 2017,June 30, 2023, the Company had unfunded loan and lease commitments to originate and purchase loans and unused lines of credit totaling $349.5 million. The Company$1.71 billion. Management believes that loan repaymentsrepayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. The liquidity sources as of June 30, 2023 include $781 million in off-balance sheet deposits and $515 million in cash and cash equivalents. When factoring in additional resources, such as the Federal Home Loan Bank, the Fed Discount Window and other unsecured funding and wholesale options, the Company has over $3 billion in total available liquidity options as of June 30, 2023.
In July 2013,As U.S. banking organizations, the Company’s primary federal regulator,Company and the Bank are required to comply with the regulatory capital rules adopted by the Federal Reserve and the Bank’s primary federal regulator, the OCC approved final rules (the “Basel III Capital Rules”"Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations. The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to financial institution holding companies and their depository institution subsidiaries, including us and the Bank, as compared to U.S. general risk-based capital rules. The Basel III Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also addressed asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replaced the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the Basel III Capital Rules implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rulesthat became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their componentsrequirements and other provisions.
Pursuant toprovisions of the Basel III Capital Rules, the Company and Bank, respectively, are subject to new regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Prior to January 1, 2015, the Bank was subject to capital requirements under Basel I and there were no capital requirements for the Company.Rules. Under the capital requirementsCapital Rules and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and 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 adequacyThe Capital Rules 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, 2017,June 30, 2023, both the BankCompany and the CompanyBank 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”)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.analyses and has included this non-GAAP financial information, and corresponding reconciliation to total equity. Regulatory Capital is not affected by the unrealized loss on AOCI. The securities portfolio is primarily comprised of amortizing securities that should provide consistent cash flow. The Company does not intend to sell these securities, or recognize the unrealized losses on its income statement, to fund future loan growth.
| | | | | | | | | | | | | | |
| At June 30, 2023 | Company | Bank | Minimum
to be Adequately Capitalized Under Prompt Corrective Action Provisions | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions |
| Tier 1 leverage capital ratio | 8.40 | % | 8.67 | % | 4.00 | % | 5.00 | % |
| Common equity Tier 1 capital ratio | 11.52 | | 12.17 | | 4.50 | | 6.50 | |
| Tier 1 capital ratio | 11.79 | | 12.17 | | 6.00 | | 8.00 | |
| Total capital ratio | 13.45 | | 13.42 | | 8.00 | | 10.00 | |
|
| | | | | | | | | | | |
| | | | | | | | Minimum |
| | | | | | | | Requirement to Be |
| | | | | | Minimum | | Well Capitalized |
| | | | | | Requirement For | | Under Prompt |
| | | | | | Capital Adequacy | | Corrective Action |
| At December 31, 2017 | Company | | Bank | | Purposes | | Provisions |
| | | | | | | | |
| Tier 1 leverage ratio | 7.68 | % | | 9.61 | % | | 4.00 | % | | 5.00 | % |
| Common equity Tier 1 capital ratio | 12.93 |
| | 16.71 |
| | 4.50 |
| | 6.50 |
|
| Tier 1 capital ratio | 13.38 |
| | 16.71 |
| | 6.00 |
| | 8.00 |
|
| Total qualifying capital ratio | 16.99 |
| | 17.11 |
| | 8.00 |
| | 10.00 |
|
The following table provides certain non-GAAP financial measures used to compute certaina reconciliation of the ratiosamounts included in the table above as well as a reconciliation of such non-GAAP financial measures tofor the most directly comparable financial measure in accordance with GAAP:Company.
| | | | | |
| (Dollars in thousands) | Standardized Approach(1) June 30, 2023 |
| Total stockholders' equity | $ | 677,721 | |
| Adjustments: | |
| LESS: Goodwill, net of associated deferred tax liabilities | 298,092 | |
| LESS: Certain other intangible assets | 22,372 | |
| LESS: Net deferred tax assets from operating loss and tax credit carry-forwards | 12,157 | |
| LESS: Net unrealized gains (losses) on available for sale securities | (207,358) | |
| LESS: Noncontrolling interest | (631) | |
| ADD: Adoption of Accounting Standards Update 2016-13 | 2,017 | |
Common Equity Tier 1(1) | 555,106 | |
| Long-term borrowings and other instruments qualifying as Tier 1 | 13,661 | |
| Tier 1 minority interest not included in common equity Tier 1 capital | (454) | |
| Total Tier 1 capital | 568,313 | |
| Allowance for credit losses | 60,489 | |
| Subordinated debentures, net of issuance costs | 19,566 | |
| Total capital | $ | 648,368 | |
| (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 were fully phased in through the end of 2021. |
|
| | | |
| | Standardized Approach (1)
December 31, 2017 |
| | (Dollars in Thousands) |
| | |
| Total equity | $ | 437,705 |
|
| Adjustments: |
|
|
| LESS: Goodwill, net of associated deferred tax liabilities | 95,705 |
|
| LESS: Certain other intangible assets | 40,417 |
|
| LESS: Net deferred tax assets from operating loss and tax credit carry-forwards | — |
|
| LESS: Net unrealized gains (losses) on available-for-sale securities | 5,782 |
|
Common Equity Tier 1 (1) | 295,801 |
|
| Long-term debt and other instruments qualifying as Tier 1 | 10,310 |
|
| LESS: Additional tier 1 capital deductions | — |
|
| Total Tier 1 capital | 306,111 |
|
| Allowance for loan losses | 9,058 |
|
| Subordinated debentures (net of issuance costs) | 73,382 |
|
| Total qualifying capital | 388,551 |
|
(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. |
| | | |
| | December 31, 2017 |
| | (Dollars in Thousands) |
| Total Stockholders' Equity | $ | 437,705 |
|
| LESS: Goodwill | 98,723 |
|
| LESS: Intangible assets | 50,521 |
|
| Tangible common equity | 288,461 |
|
| LESS: AOCI | 5,782 |
|
| Tangible common equity excluding AOCI | 282,679 |
|
Due to the predictable, quarterly cyclicalitytotal stockholders' equity. Each of MPS deposits in conjunction with tax season business activity, management believes that a six-month capital calculationtangible common equity and tangible common equity excluding AOCI is a useful metric to monitornon-GAAP financial measure that is commonly used within the Company’s overall capital management process. As such, the Bank’s six-month average Tier 1 leverage ratio, Common equity Tier 1 capital ratio, Tier 1 capital ratio, and Total qualifying capital ratio asbanking industry.
| | | | | |
| (Dollars in thousands) | At June 30, 2023 |
| Total stockholders' equity | $ | 677,721 | |
| LESS: Goodwill | 309,505 | |
| LESS: Intangible assets | 21,830 | |
| Tangible common equity | 346,386 | |
| LESS: AOCI | (207,896) | |
| Tangible common equity excluding AOCI | $ | 554,282 | |
BeginningSince January 1, 2016, Basel III implemented a requirement for all banking organizationsthe Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The implementation of the capital conservation buffer began on January 1, 2016, which increased or will increase the three risk-based capital ratios by 0.625% each year through 2019, at which point therequired Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios were or will bewith 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 targetedthe capital ratiosconservation buffer of 2.5% in addition to required by the revised requirements, as they become effective.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, 20172022 for a summary of our contractual obligations as of September 30, 2017.2022. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 20172022 through December 31, 2017.June 30, 2023.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
For discussion of the Company’s off-balance sheet financing arrangements as of December 31, 2017, see Note 6 to our consolidated financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 6 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.prepayment, and deposit behaviors.
If the Company’s assets mature or reprice more rapidly or to a greater extent than its liabilities, then economic value of equity and net interest income would tend to increase during periods of rising rates and decrease during periods of falling interest rates. Conversely, if the Company’s assets mature or reprice more slowly or to a lesser extent than its liabilities, then economic value of equity and net interest income would tend to decrease during periods of rising interest rates and increase during periods of falling interest rates.
The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate and fixed-rate loan products with short to intermediate terms to maturity, and may originate loans with terms longer than five years for borrowers that have a strong credit profile and typically lower loan-to-value ratios. This approach allows the Company to better maintain a portfolio of loans that will have less sensitivity to changes in the level of interest rates, while providing a reasonable spread to the cost of liabilities used to fund the loans.
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 prepaid divisionBaaS business line 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 compressescompress the Company’s net interest margin. As a result
A portion of the Company’s interestdeposit balances are subject to variable card processing expenses, derived from contractual agreements with certain BaaS partners tied to a rate risk exposureindex, typically the EFFR. These costs reprice immediately upon a change in this regard, the Company has elected not to enter into any new longer-term wholesale borrowings, and generally has not emphasized longer-term time deposit products.application rate index.
The Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds at one or more third-party banks insured by the FDIC (each, a “Program Bank”). These custodial deposits earn recordkeeping service fee income, typically reflective of the EFFR.
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 Bank, like other financial institutions, is subject toCompany's interest rate risk to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. The interest rate risk processanalysis 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. This analysis may not represent all impacts driven by changes in the interest rate environment, such as certain other card fee income and expense line items. 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 DirectorsCompany has created an InvestmentAsset/Liability Committee whose principal responsibilities are to assess the Bank’s asset/liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes in interest rates.
The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value of Equity (“EVE analysis”). Under EAR analysis, net interest income is calculated for each interest rate scenario and compared 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 judgementjudgment 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 loanlending and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude, and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We performThe Company performs various sensitivity analyses on assumptions of deposit attrition, loan prepayments, and deposit re-pricing. Market-impliedasset re-pricing, as well as market-implied forward rates and various likely and extreme interest rate scenarios, can be used for EAR analysis. These likely and extreme scenarios can includeincluding 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. Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.
The Company was within Board policy limits for all rate scenarios using the snapshot as of December 31, 2017 as required by regulation. Thefollowing table below shows the results of the scenarios as of December 31, 2017:June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sensitive Earnings at Risk |
| | | | Change in Interest Income/Expense
for a given change in interest rates |
| | | Over/(Under) Base Case Parallel Shift |
| (Dollars in Thousands) | Book Value | | -200 | -100 | Base | +100 | +200 | +300 | +400 |
| Total interest-sensitive income | 6,607,817 | | | 375,358 | | 402,027 | | 428,318 | | 454,263 | | 480,236 | | 506,128 | | 532,178 | |
| Total interest-sensitive expense | 455,290 | | | 8,601 | | 11,312 | | 14,441 | | 18,191 | | 21,941 | | 25,729 | | 29,492 | |
| Net interest-sensitive income | | | 366,757 | | 390,715 | | 413,877 | | 436,072 | | 458,295 | | 480,399 | | 502,686 | |
| | | | | | | | | |
| Percentage change from base | | | -11.4 | % | -5.6 | % | — | % | 5.4 | % | 10.7 | % | 16.1 | % | 21.5 | % |
Net Sensitive Earnings at Risk
|
| | | | | | | | | | | | | | |
| Net Sensitive Earnings at Risk |
| Balances as of December 31, 2017 | Standard (Parallel Shift) Year 1 |
| | Net Interest Income at Risk% |
| | -100 | | +100 | | +200 | | +300 | | +400 |
| Basis Point Change Scenario | -7.4 | % | | 3.3 | % | | 5.5 | % | | 7.4 | % | | 9.4 | % |
| Board Policy Limits | -8.0 | % | | -8.0 | % | | -10.0 | % | | -15.0 | % | | -20.0 | % |
The EAR analysis reported at December 31, 2017June 30, 2023, shows that in all rising rate scenarios,total interest-sensitive income will change more assetsrapidly than liabilities would repricetotal interest-sensitive expense over the modeled one-year period.
next year. IRR is a snapshot in time. The Company’s business and deposits are very predictably cyclical on a weekly, monthly and yearly basis. The Company’s static IRR results could vary depending on which day of the week and timing in relation to certain payrolls, as well as time of the month in regard to early funding of certain programs, when this snapshot is taken. The Company’s overnight federal funds purchased fluctuates on a predictable daily and monthly basis due to fluctuations in a portion of its non-interest bearing deposit base,ends, primarily related to payroll processing and timing of when certain programs are prefunded and when the funds are received. Fiscal first quarter 2018 results do not necessarily show the typical effect of day of week cyclicality due to the temporary repositioning of the balance sheet, as previously noted.
Owing to the snapshot nature of IRR, as is required by regulators, in concert with the Company’s predictable weekly, monthly and yearly fluctuating deposit base and overnight borrowings, the results produced by static IRR analysis are not necessarily representative of what management, the Board of Directors, and others would view as the Company’s true IRR positioning. Management and the Board are aware of and understand these typical borrowing and deposit fluctuations as well as the point in time nature of IRR analysis and anticipated an outcome where the Company may temporarily be outside of Board policy limits based on a snapshot analysis.
For management to better understand the IRR position of the Bank, an alternative IRR analysis was completed whereby all December 31, 2017 values were utilized with the exception of overnight borrowings, non-interest bearing deposits, brokered deposits, cash due from banks, non-earning assets, and non-paying liabilities. To diminish potential issues documented above, quarterly average balances were utilized for overnight borrowings, non-interest-bearing deposits, brokered deposits and cash due from banks. Non-earning assets and non-paying liabilities were used to balance the balance sheet. Management believes this view on IRR, while still subject to some yearly cyclicality, more accurately portrays the Bank's IRR position. As noted in the below chart, the alternative EAR results are more normalized and slightly improved in the -100 interest rate shock compared to the static results, as timing issues in deposits and overnight borrowings are diminished and lower balances in cash and due from banks are observed.
The Company was within policy limits as of December 31, 2017 in all scenarios utilizing the alternative IRR scenario run. The table below highlights those results:
Alternative Net Sensitive Earnings at Risk |
| | | | | | | | | | | | | | |
| Net Sensitive Earnings at Risk |
| Alternative IRR Results | Standard (Parallel Shift) Year 1 |
| | Net Interest Income at Risk% |
| | -100 | | +100 | | +200 | | +300 | | +400 |
| Basis Point Change Scenario | -5.5 | % | | 0.9 | % | | 0.6 | % | | — | % | | -0.5 | % |
| Board Policy Limits | -8.0 | % | | -8.0 | % | | -10.0 | % | | -15.0 | % | | -20.0 | % |
The alternative EAR analysis reported at December 31, 2017 shows that in an increasing +100 and +200 interest rate environment, more assets than liabilities would reprice over the modeled one-year period. However, in the +300 scenario the results are more neutral to changes in interest rates, and in the +400 interest rate scenario, more liabilities (primarily due to overnight federal funds purchased) than assets would reprice over the modeled one-year period.
The alternative IRR results were somewhat lower in regard to the change in net interest income at risk percentages as compared to the fiscal 2018 first quarter alternative IRR results which resulted from higher average borrowings and an increased average interest-bearing deposit base. The Company anticipates solid EAR results in a rising rate environment due to continued commercial insurance premium finance loan growth, the addition of adjustable rate loans and securities, continued growth of non-interest bearing MPS deposits, and the sustained execution on its strategic plan.
Net Sensitive Earnings at Risk as of December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Balances as of December 31, 2017 | | | | | | | |
| | | | % of | | Change in Interest Income/Expense
for a given change in interest rates | | |
| | Total Earning | | Total Earning | | Over / (Under) Base Case Parallel Shift | | |
| Basis Point Change Scenario | Assets (in $000's) | | Assets | | -100 | | Base | | +100 | | +200 | | +300 | | +400 |
| Total Loans | 1,509,141 |
| | 30.2 | % | | 65,404 |
| | 70,803 |
| | 75,956 |
| | 80,981 |
| | 85,966 |
| | 91,142 |
|
| Total Investments (non-TEY) and other Earning Assets | 3,484,181 |
| | 69.8 | % | | 59,605 |
| | 78,231 |
| | 94,619 |
| | 109,695 |
| | 124,544 |
| | 139,321 |
|
| Total Interest-Sensitive Income | 4,993,322 |
| | 100.0 | % | | 125,009 |
| | 149,033 |
| | 170,575 |
| | 190,676 |
| | 210,509 |
| | 230,463 |
|
| Total Interest-Bearing Deposits | 734,000 |
| | 35.8 | % | | 6,482 |
| | 8,244 |
| | 12,439 |
| | 16,634 |
| | 20,829 |
| | 25,024 |
|
| Total Borrowings | 1,315,261 |
| | 64.2 | % | | 7,543 |
| | 20,878 |
| | 34,212 |
| | 47,547 |
| | 60,883 |
| | 74,234 |
|
| Total Interest-Sensitive Expense | 2,049,262 |
| | 100.0 | % | | 14,025 |
| | 29,122 |
| | 46,651 |
| | 64,181 |
| | 81,711 |
| | 99,258 |
|
Alternative Net Sensitive Earnings at Risk
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Alternative IRR Results | | | | | | | |
| | | | % of | | Change in Interest Income/Expense
for a given change in interest rates | | |
| | Total Earning | | Total Earning | | Over / (Under) Base Case Parallel Shift | | |
| Basis Point Change Scenario | Assets (in $000's) | | Assets | | -100 | | Base | | +100 | | +200 | | +300 | | +400 |
| Total Loans | 1,509,141 |
| | 39.4 | % | | 65,404 |
| | 70,803 |
| | 75,956 |
| | 80,981 |
| | 85,966 |
| | 91,142 |
|
| Total Investments (non-TEY) and other Earning Assets | 2,323,118 |
| | 60.6 | % | | 52,958 |
| | 59,952 |
| | 64,692 |
| | 68,099 |
| | 71,273 |
| | 74,350 |
|
| Total Interest-Sensitive Income | 3,832,259 |
| | 100.0 | % | | 118,362 |
| | 130,755 |
| | 140,648 |
| | 149,080 |
| | 157,238 |
| | 165,492 |
|
| Total Interest-Bearing Deposits | 797,475 |
| | 65.4 | % | | 7,402 |
| | 9,193 |
| | 13,747 |
| | 18,301 |
| | 22,855 |
| | 27,409 |
|
| Total Borrowings | 421,370 |
| | 34.6 | % | | 2,468 |
| | 6,739 |
| | 11,011 |
| | 15,282 |
| | 19,566 |
| | 23,860 |
|
| Total Interest-Sensitive Expense | 1,218,845 |
| | 100.0 | % | | 9,870 |
| | 15,932 |
| | 24,758 |
| | 33,583 |
| | 42,421 |
| | 51,269 |
|
The Company believes that its growing portfolio of non-interest 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 will likely remain relatively low, with less increase expected relative to many other banks. When unable to match loan growth to deposit growth, the Company continues to execute its investment strategy of primarily purchasing NBQ municipal bonds and agency MBS, however, the Bank reviews opportunities to add diverse, high quality securities at attractive relative rates when opportunities present themselves. The NBQ municipal bonds are tax exempt and as such have a tax equivalent yield higher than their book yield. The tax equivalent yield calculation for NBQ municipal bonds uses the Company’s cost of funds as one of its components. With the Company’s large volume of non-interest bearing deposits, the tax equivalent yield for these NBQ municipal bonds is higher than a similar term investment in other investment categories of similar risk and higher than most other banks can realize and sustain on the same or similar instruments. The above interest income figures are quoted on a pre-tax basis which is particularly notable due to the size of the Company’s tax-exempt municipal portfolio.
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. Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.
The Company was within Board policy limits for all scenarios. Thefollowing table below shows the results of the scenarios as of December 31, 2017:June 30, 2023:
| | | | | | | | | | | | | | | | | | | | |
| Economic Value Sensitivity | | | | | | |
| Standard (Parallel Shift) |
| | Economic Value of Equity at Risk % |
| | -200 | -100 | +100 | +200 | +300 | +400 |
| Percentage change from base | -10.3 | % | -4.3 | % | 3.3 | % | 6.1 | % | 8.4 | % | 10.9 | % |
Economic Value Sensitivity as of December 31, 2017
|
| | | | | | | | | | | | | | |
| Balances as of December 31, 2017 | Standard (Parallel Shift) |
| | Economic Value of Equity at Risk% |
| | -100 | | +100 | | +200 | | +300 | | +400 |
| Basis Point Change Scenario | -4.1 | % | | -1.3 | % | | -4.8 | % | | -9.3 | % | | -12.7 | % |
| Board Policy Limits | -10.0 | % | | -10.0 | % | | -20.0 | % | | -30.0 | % | | -40.0 | % |
The EVE at risk reported at December 31, 2017June 30, 2023 shows that as interest rates increase, the economic value of equity position will decreaseis expected to benefit from the base, primarilyrising interest rates due to the degreelarge amount of the economic value of its base asset size in relation to the economic value of its base liability size. When viewing total asset versus total liability economic value, projected total assets are affected similarly on a percentage basis as compared to projected total liabilities in a rising rate environment.noninterest-bearing funding.
The Company was within policy limits in all scenarios utilizing the alternative IRR scenario run for management purposes. The table below highlights those results:
Alternative Economic Value Sensitivity
|
| | | | | | | | | | | | | | |
| Alternative IRR Results | Standard (Parallel Shift) |
| | Economic Value of Equity at Risk% |
| | -100 | | +100 | | +200 | | +300 | | +400 |
| Basis Point Change Scenario | -0.9 | % | | -3.8 | % | | -9.3 | % | | -15.5 | % | | -20.5 | % |
| Board Policy Limits | -10.0 | % | | -10.0 | % | | -20.0 | % | | -30.0 | % | | -40.0 | % |
The EVE at risk reported using the alternative methodology used for management purposes shows that if interest rates increase immediately, the economic value of equity position will decrease from the base, partially due to the degree of the economic value of its base asset size in relation to the economic value of its base liabilities size.
Detailed Economic Value Sensitivity
The following table details the economic value sensitivity to changes in market interest rates at December 31, 2017, for loans, investments, deposits, borrowings, and other assets and liabilities (dollars in thousands). The analysis reflects that in the +100 and +200 rising rate scenarios, total assets are marginally less sensitive than total liabilities, while in the +300 and +400, total assets are marginally more sensitive than total liabilities. Asset sensitivity is offset by the non-interest bearing deposits.
|
| | | | | | | | | | | | | | | | | | | | |
| Balances as of December 31, 2017 | | | | | | | |
| | | | % of | | Change in Economic Value
for a given change in interest rates | | |
| | Book | | Total | | Over / (Under) Base Case Parallel Shift | | |
| Basis Point Change Scenario | Value (in $000's) | | Assets | | -100 | | +100 | | +200 | | +300 | | +400 |
| Total Loans | 1,500,279 |
| | 28 | % | | 2.0 | % | | -2.0 | % | | -4.1 | % | | -6.0 | % | | -7.9 | % |
| Total Investment | 3,484,181 |
| | 64 | % | | 2.3 | % | | -3.2 | % | | -6.6 | % | | -9.9 | % | | -12.8 | % |
| Other Assets | 420,792 |
| | 8 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Assets | 5,405,252 |
| | 100 | % | | 2.1 | % | | -2.6 | % | | -5.4 | % | | -8.1 | % | | -10.4 | % |
| Interest Bearing Deposits | 734,000 |
| | 15 | % | | 1.7 | % | | -1.5 | % | | -3.0 | % | | -4.3 | % | | -5.5 | % |
| Non-Interest Bearing Deposits | 2,783,941 |
| | 57 | % | | 5.7 | % | | -5.1 | % | | -9.7 | % | | -13.8 | % | | -17.5 | % |
| Total Borrowings & Other Liabilities | 1,363,650 |
| | 28 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Liabilities | 4,881,591 |
| | 100 | % | | 3.2 | % | | -2.9 | % | | -5.5 | % | | -7.8 | % | | -10.0 | % |
Detailed Alternative Economic Value Sensitivity
The following is EVE at risk reported using the alternative methodology used for management purposes, for loans, investments, deposits, borrowings, and other assets and liabilities (dollars in thousands). The analysis reflects that in rising interest rate scenarios, the total assets are slightly more sensitive in regard to economic value sensitivity.
|
| | | | | | | | | | | | | | | | | | | | |
| Alternative IRR Results | | | | | | | |
| | | | % of | | Change in Economic Value
for a given change in interest rates | | |
| | Book | | Total | | Over / (Under) Base Case Parallel Shift | | |
| Basis Point Change Scenario | Value (in $000's) | | Assets | | -100 | | +100 | | +200 | | +300 | | +400 |
| Total Loans | 1,500,279 |
| | 28 | % | | 2.0 | % | | -2.0 | % | | -4.1 | % | | -6.0 | % | | -7.9 | % |
| Total Investment | 2,323,118 |
| | 43 | % | | 3.5 | % | | -4.9 | % | | -9.9 | % | | -14.9 | % | | -19.2 | % |
| Other Assets | 1,581,855 |
| | 29 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Assets | 5,405,252 |
| | 100 | % | | 2.1 | % | | -2.6 | % | | -5.4 | % | | -8.1 | % | | -10.4 | % |
| Interest Bearing Deposits | 797,475 |
| | 16 | % | | 1.1 | % | | -1.0 | % | | -1.9 | % | | -2.8 | % | | -3.7 | % |
| Non-Interest Bearing Deposits | 2,333,111 |
| | 48 | % | | 5.8 | % | | -5.1 | % | | -9.7 | % | | -13.8 | % | | -17.5 | % |
| Total Borrowings & Other Liabilities | 1,751,006 |
| | 36 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Liabilities | 4,881,591 |
| | 100 | % | | 2.7 | % | | -2.4 | % | | -4.5 | % | | -6.5 | % | | -8.2 | % |
Certain shortcomings are inherent in the method of analysis discussed above and as presented in the tables above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Furthermore, although management has estimated changes in the levels of prepayments and early withdrawal in these rate environments, such levels would likely deviate from those assumed in calculating the tables above. Finally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.
Item 4. Controls and Procedures.
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 June 30, 2023, 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, as of June 30, 2023, the Company’s disclosure controls and procedures were designed effectively to ensure timely alerting of material information relating to the Company required to be included in the Company's periodic SEC filings.
The Company had previously disclosed a material weakness related to access permissions in two loan systems which resulted in a lack of segregation of duties over disbursements in which select individuals had the ability to both initiate and approve disbursements indicating that the user access provisioning and user entitlement review monitoring controls did not function to a precise level to ensure segregation of duties was maintained. The remediation of this condition was completed as of June 30, 2023.
REMEDIATION PLAN FOR PREVIOUSLY REPORTED MATERIAL WEAKNESS
The Company completed a broad risk assessment across all financially significant applications to identify and monitor conflicting roles which has strengthened the control environment surrounding user access controls.
User access provisioning preventative controls were strengthened to monitor for the conflicting roles identified in the risk assessment described above. System entitlement detective reviews have increased frequency from annual to quarterly cycles. Management has also implemented a system application control to systematically restrict the ability to both initiate and disburse funds in one of the significant commercial systems which had inappropriate access leading to the material weakness. In combination, management believes remediation of the material weakness has occurred as of June 30, 2023.
INHERENT LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2017, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the CompanyManagement conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarterthree months ended December 31, 2017,June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controlcontrols over financial reporting. Based on suchthis evaluation, management concluded that, as of the end of the period covered by this report, there have not been anywere changes in the Company’s internal controlcontrols over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange1934 Act) that were reported in the prior fiscal year and prior quarters where remediation was completed during the fiscal third quarter to which this report relates that could have materially affected or are reasonably likely to materially affect, the Company’s internal controlcontrols over financial reporting.reporting, as described above.
PATHWARD FINANCIAL, GROUP, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings. – See “Legal Proceedings” under Note 6
There are no material pending legal proceedings to which we are a party or to which any of our properties are subject. There are no material proceedings known to us to be contemplated by any governmental authority. We are involved in a variety of litigation matters in the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.ordinary course of our business and anticipate that we will become involved in new litigation matters in the future.
ItemItem 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, 2017.2022. There were no material changes to those risk factors during the threenine months ended December 31, 2017,June 30, 2023, except that the following risk factors are hereby updated or added:
There are risks associated with the proposed transaction with Crestmark and Crestmark Bank, including the receipt of required shareholder and regulatory approvals and timing for completion of the transactions contemplated thereby.
We recently announced that we and MetaBank have entered into a definitive agreement and plan of merger with Crestmark and its wholly-owned subsidiary, Crestmark Bank, whereby we will acquire Crestmark in an all-stock transaction. The transaction remains subject to approval of our stockholders and Crestmark’s shareholders, regulatory approvals andOur business could suffer if consumer behaviors, or other closing conditions. It is possible that one or more of the closing conditions may not be satisfied or that it may take an extended amount of time until they are. Accordingly, there is a risk that the proposed transaction may not be completed on a timely basis or at all, which could have adverse effects on the market price of our common stock and our operating results. Furthermore, the transaction involves a number of other risks and uncertainties, including, but not limited to, the following:
the businesses may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected;
the risk that the expected growth opportunities, beneficial synergies and/or operating efficiencies from the proposed transaction may not be fully realized or may take longer to realize than expected;
customer losses and business disruption in connection with and following the acquisition;
potential litigation relating to the transaction;
the risk that the Company may incur unanticipated or unknown losses or liabilities if it completes the proposed transaction; and
potential adverse effects on the market price of our common stock caused by the sale of such stock held by former Crestmark shareholders following the transaction.
Any of the foregoing risks or similar risks could have an adverse impact on our business. We have also incurred, and will incur, significant expenses associated with the proposed transaction with Crestmark, including fees of professional advisors.
Additional information regarding the risks and uncertainties associated with the proposed transaction with Crestmark will be contained in the registration statement on Form S-4, which will include a joint proxy statement and prospectus, that we intend to file with the SECfactors, in connection with the proposed transaction.use of prepaid cards change, or there are adverse developments with respect to the prepaid financial services industry in general.
Program agreements thatAs the Company andprepaid financial services industry evolves, consumers may either find prepaid financial services to be less attractive than other financial services or may change the Bank have entered into, and expect to enter into from time to timeway in which they utilize the future, with third parties to market and service consumer loans originated by the Bank may subject the Bank to claims from regulatory agencies and other third parties that, if successful, could negatively impact MetaBank’s ongoing and future business.
On January 25, 2018, the Company announced that the Bank had entered into a lending program with Liberty Lending, LLC, an unaffiliated third party (“Liberty”), whereby Liberty will market and service unsecured consumer loans underwritten and originated by the Bank. See “Item 2. Management’s Discussion and Analysisprepaid cards provide. Consumers might not use prepaid financial services for any number of Financial Condition and Results of Operations - Business Developments” for further information regarding the Bank’s program agreement with Liberty. The Company expects the Bank to enter into similar program agreements with other third parties to market and service loans originated by the Bank, from time to time in the future. Certain types of these arrangements have been challenged both in the courts and in regulatory actions. In these actions, plaintiffs have generally argued that the “true lender” is the marketer and that the intent of such lending program is to evade state usury and loan licensing laws. Other cases have also included other claims, including racketeering and other state law claims, in their challenge of such programs. There can be no assurance that lawsuits or regulatory actions in connection with any such lending programs the Bank enters into will not be brought in the future. If a regulatory agency, consumer advocate groupreasons. For example, negative publicity surrounding us or other third party wereprepaid financial service providers could impact the Payments business and prospects for growth to bring an action against the Bankextent it adversely impacts the perception of prepaid financial services. Consumer spend behaviors could increase or anydecrease, or become more difficult to accurately predict, thereby impacting operating revenues and/or expenses of the third parties with which the Bank operates such lending programs, suchCompany. Growth of prepaid financial services as Liberty, and such actions were successful, such an outcomeelectronic payment mechanism may not occur or may occur more slowly than estimated. These factors could have a material adverse effect on our financial condition and results of operations.
The loss or transition of key members of our senior management team or key employees in the BankBank's divisions, or our inability to attract and retain qualified personnel, could adversely affect our business.
We believe that our success depends largely on the efforts and abilities of our senior executive management team and other key employees. Their experience and industry contacts significantly benefit us. Our future success also depends in part on our ability to attract, retain and motivate key management and operating personnel. We completed a Chief Executive Officer and Chief Operating Officer transition in October 2021 and announced a Chief Financial Officer transition in October 2022 that would have been effective April 30, 2023. This transition has been extended as the Company commenced a search for a successor on March 27, 2023, after announcing the Deputy Chief Financial Officer will no longer be succeeding the Chief Financial Officer. Management transitions may create uncertainty and involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows.
Additionally, as we continue to develop and expand our operations, we may require personnel with different skills and experiences, with a sound understanding of our business and the Company.industries in which we operate. The competition for qualified personnel in the financial services industry is intense, and the loss of any of our key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect our business.
Agreements with Liberty Lending
Adverse developments or concerns affecting the financial services industry in general or specific financial institutions, such as bank closures and others wherebyother developments in the Bank will originateUnited States banking industry could adversely affect our financial condition and hold unsecured consumer loans, may resultresults of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in increased exposure to credit risk and fraudthe financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar events, have in the past and may presentin the future lead to erosion of customer confidence in the banking system, deposit volatility, liquidity issues, stock price volatility, and other adverse developments. For example, the closures of Silicon Valley Bank ("SVB") and Signature Bank in March 2023 led to disruption and volatility, including deposit outflows and increased need for liquidity, at certain banks. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, it is not certain that the Federal Reserve or FDIC will treat future bank failures similarly. On May 1, 2023, First Republic Bank was also closed by its primary state regulator, which appointed the FDIC as receiver, and the FDIC announced that JP Morgan Chase Bank, National Association agreed to assume all of First Republic Bank's deposits and substantially all of its assets with an estimated cost to the Deposit Insurance Fund of approximately $13 billion.
Similarly, inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Any sale of investment securities that are held in an unrealized loss position by financial institutions for liquidity or other purposes will cause actual losses to be realized. There can be no assurance that there will not be additional risks.
Althoughbank failures or issues such as liquidity concerns in the Bank has offered unsecured consumer loans to its customers through its brick-and-mortar branch network,broader financial services industry or in the Bank’s entry into program agreements with other third parties toU.S. financial system as a whole. Adverse financial market and service loans originated by the Bank, such as its recently announced program agreement with Liberty, represents a new area of the consumereconomic conditions can exert downward pressure on stock prices, security prices, and credit marketavailability for the Bank, which presents potential increased credit risks. As a result of the loans originated under such program being unsecured, in the event a borrower does not repay the loan in accordance with its terms or otherwise defaults on the loan, the Bank may not be ablefinancial institutions without regard to recovertheir underlying financial strength. The volatility and economic disruption resulting from the borrower an amount sufficient to payfailures of SVB and Signature Bank particularly impacted the price of securities issued by financial institutions, including us.
While we did not experience any remaining balance onabnormal changes in our total outstanding deposit balances following the loan. See “If the Company’s actual loan losses exceed the Company’s allowance for loan losses, the Company’s net income will decrease.” We may also become subject to claims by regulatory agencies or other third partiesbank closures and related events, we experienced changes in deposit balances resulting from typical seasonal fluctuations due to the conductnature of our business. While our deposit base primarily consists of millions of retail cards and other small dollar accounts with an average balance less than $1,000 and we maintain a liquidity position with numerous funding options available totaling over $3.0 billion as of June 30, 2023, we cannot be assured that unusual deposit withdrawal activity will not affect banks generally in the future or us in particular. Continued uncertainty regarding or worsening of the third parties with whichseverity or duration of the Bank operates such lending programs if such conduct does not comply with applicable lawsvolatility in the banking industry could also adversely impact our estimate of our ACL and related provision for credit losses. In connection with marketingthe bank closures, the United States federal bank regulators announced that losses to support uninsured deposits of the closed banks would be recovered via a special assessment on banks, which along with related costs to the Deposit Insurance Fund could led to an increase in our deposit insurance assessments.
Any of these impacts, or any other impacts resulting from the events described above, could have a material adverse effect on our liquidity and servicing loansour current and/or projected business operations and financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities.
The Company's Board of Directors authorized a 6,000,000 share repurchase program on September 3, 2021 that was publicly announced on September 7, 2021 and is scheduled to expire on September 30, 2024. The table below sets forth information regarding repurchases of our common stock during the fiscal 2023 third 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 |
| April 1 to 30 | — | | $ | — | | — | | 2,468,283 | |
| May 1 to 31 | 490,120 | | 43.83 | | 490,120 | | 1,978,163 | |
| June 1 to 30 | — | | — | | — | | 1,978,163 | |
| Total | 490,120 | | | 490,120 | | |
(1) All shares not purchased as part of the Company's publicly announced repurchase program were 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.
Item 5. Other Information
Adoption or Termination of Trading Arrangements by Directors and Executive Officers
During the fiscal quarter ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the 1934 Act) informed us of the adoption or termination of any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Item 408 of Regulation S-K, except as described in the table below.
| | | | | | | | | | | | | | | | | |
| Name and Title | Date Adopted | Character of Trading Arrangement(1) | Aggregate Number of Shares of Common Stock to be Purchased or Sold Pursuant to Trading Arrangement | Duration(2) | Date Terminated |
| Glen Herrick, EVP Chief Financial Officer | May 16, 2023 | Rule 10b5-1 Trading Arrangement(3) | Up to 20,000 shares to be sold | November 1, 2023 to January 30, 2024 | Not applicable |
(1) Except as indicated by footnote, the trading arrangement marked as "Rule 10b5-1 Trading Arrangement" in the above table (the "Trading Arrangement") is intended to satisfy the affirmative defense of Rule 10b5-1(c), as amended (the "Rule").
(2) The Trading Arrangement permits transactions through: (a) the termination or suspension of the Trading Arrangement, or (b) the earliest to occur of (i) the date set forth in the above table, (ii) completion of all sales under the program.Trading Arrangement, (iii) receipt of notice of Mr. Herrick’s death, or (iv) receipt of notice of the commencement of any proceedings in respect of or triggered by Mr. Herrick’s bankruptcy or insolvency. The Trading Arrangement only permits transactions after expiration of the applicable mandatory cooling-off period under the Rule.
(3) Compiled with the then-applicable requirements of Rule 10b5-1(c) when adopted in May 2023.
Item 6. Exhibits.
|
| | | | |
Exhibit
Number
| Description |
| |
| Agreement and Plan of Merger, dated as of January 9, 2018, by and among Meta Financial Group, Inc., MetaBank, Crestmark Bancorp, Inc. and Crestmark Bank, filed on January 9, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference. |
| |
| Certificate of Incorporation, as amended |
| |
| Amended and Restated Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended, filed on January 24, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, is 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.INS101 | Instance DocumentThe following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Cover Page, (ii) Condensed Consolidated Statements of Financial Condition, (iii) Condensed Consolidated Statements of Operations, (iv) Condensed Consolidated Statements of Comprehensive Income, (v) Condensed Consolidated Statements of Changes in Stockholders' Equity, (vi) Condensed Consolidated Statements of Cash Flows, and (vii) Notes to Condensed Consolidated Financial Statements, tagged in summary and in detail. |
| |
101.SCH104 | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Schema Document |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Documentand contained in Exhibit 101). |
META
PATHWARD 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.
|
| | | | | | | |
| METAPATHWARD FINANCIAL, GROUP, INC. |
| | |
Date: February 7, 2018August 8, 2023 | By: | /s/ J. Tyler HaahrBrett L. Pharr |
| | J. Tyler Haahr, Chairman of the BoardBrett L. Pharr, |
| | and Chief Executive Officer and Director |
| | |
Date: February 7, 2018August 8, 2023 | By: | /s/ Glen W. Herrick |
| | Glen W. Herrick, |
| | Executive Vice President |
| | and Chief Financial Officer |
