A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share is presented below.
|
| | | | | | | |
Three Months Ended December 31, | 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 |
|
22
NOTE 5. SECURITIES6. RENTAL EQUIPMENT, NET
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 adoptionRental equipment consists of the ASU, the Company transferred $204.7 million of investment securities and $101.3 million of MBS from HTMfollowing:
| | | | | | | | | | | |
(Dollars in thousands) | December 31, 2023 | | September 30, 2023 |
Computers and IT networking equipment | $ | 23,958 | | | $ | 25,094 | |
Motor vehicles and other | 125,801 | | | 122,845 | |
Other furniture and equipment | 46,934 | | | 37,637 | |
Solar panels and equipment | 149,157 | | | 142,355 | |
Total | 345,850 | | | 327,931 | |
| | | |
Accumulated depreciation | (118,120) | | | (117,418) | |
Unamortized initial direct costs | 1,186 | | | 1,237 | |
Net book value | $ | 228,916 | | | $ | 211,750 | |
Future minimum lease payments expected to AFS during the first quarter of fiscal 2018. This change allowsbe received 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 securitiesoperating leases at December 31, 2017 and September 30, 2017 are presented below.2023 were as follows:
| | | | | |
(Dollars in thousands) | |
Remaining in 2024 | $ | 32,519 | |
2025 | 36,915 | |
2026 | 27,052 | |
2027 | 19,132 | |
2028 | 10,461 | |
Thereafter | 10,805 | |
Total | $ | 136,884 | |
|
| | | | | | | | | | | | | | | |
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 |
|
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
|
| | | | | | | | | | | | | | | |
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 excessheld a total of fair value and considered only temporarily impaired.
GAAP requires that, at acquisition, an enterprise classify debt securities into one$309.5 million 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 securitiesgoodwill at December 31, 2017 or September 30, 2017.
Gross unrealized losses and fair value, aggregated by investment category and length2023. The recorded goodwill is a result of timemultiple business combinations that individual securitiesoccurred from 2015 to 2018. There 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,no changes to 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 contractualcarrying 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 forgoodwill during the three months ended December 31, 2017:2023.
The changes in the carrying amount of the Company’s intangible assets were as follows: |
| | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Trademark(1) | Non-Compete | Customer Relationships(2) | All Others(3) | Total |
At September 30, 2023 | $ | 7,477 | | $ | — | | $ | 9,110 | | $ | 4,133 | | $ | 20,720 | |
| | | | | |
Amortization during the period | (264) | | — | | (587) | | (133) | | (984) | |
| | | | | |
At December 31, 2023 | $ | 7,213 | | $ | — | | $ | 8,523 | | $ | 4,000 | | $ | 19,736 | |
| | | | | |
Gross carrying amount | $ | 13,774 | | $ | 301 | | $ | 77,578 | | $ | 7,798 | | $ | 99,451 | |
Accumulated amortization | (6,561) | | (301) | | (58,137) | | (3,579) | | (68,578) | |
Accumulated impairment | — | | — | | (10,918) | | (219) | | (11,137) | |
At December 31, 2023 | $ | 7,213 | | $ | — | | $ | 8,523 | | $ | 4,000 | | $ | 19,736 | |
| | | | | |
At September 30, 2022 | $ | 8,605 | | $ | — | | $ | 12,395 | | $ | 4,691 | | $ | 25,691 | |
| | | | | |
Amortization during the period | (351) | | — | | (776) | | (131) | | (1,258) | |
| | | | | |
At December 31, 2022 | $ | 8,254 | | $ | — | | $ | 11,619 | | $ | 4,560 | | $ | 24,433 | |
| | | | | |
Gross carrying amount | $ | 14,624 | | $ | 2,481 | | $ | 82,088 | | $ | 9,940 | | $ | 109,133 | |
Accumulated amortization | (6,370) | | (2,481) | | (59,551) | | (5,162) | | (73,564) | |
Accumulated impairment | — | | — | | (10,918) | | (218) | | (11,136) | |
At December 31, 2022 | $ | 8,254 | | $ | — | | $ | 11,619 | | $ | 4,560 | | $ | 24,433 | |
(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. |
| | | | | | |
| 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 |
|
(3) Book amortization period of 3-20 years. Amortized using the straight line method.
DuringThe 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 first and second quartersremaining nine months 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.
At2024 and subsequent fiscal years at December 31, 2017, stock-based compensation expense not yet recognized in income totaled $17.2 million, which is expected2023 was as follows:
| | | | | |
(Dollars in thousands) | |
Remaining in 2024 | $ | 3,148 | |
2025 | 3,569 | |
2026 | 3,223 | |
2027 | 2,577 | |
2028 | 2,267 | |
Thereafter | 4,952 | |
Total anticipated intangible amortization | $ | 19,736 | |
There were no impairments 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 expensesintangible assets 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, 20172023 and 2016, respectively.2022. Intangible impairment expense is recorded within the impairment expense line of the Condensed Consolidated Statements of Operations.
|
| | | | | | | | | | | | | | | |
| 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 |
|
NOTE 8. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES
Operating lease right-of-use ("ROU") assets, included in other assets, were $26.8 million and $26.9 million at December 31, 2023 and September 30, 2023, respectively.
Operating lease liabilities, included in accrued expenses and other liabilities, were $28.6 million and $28.8 million at December 31, 2023 and September 30, 2023, respectively.
Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities at December 31, 2023 were as follows:
| | | | | |
(Dollars in thousands) | |
Remaining in 2024 | $ | 3,141 | |
2025 | 3,985 | |
2026 | 3,435 | |
2027 | 3,152 | |
2028 | 3,095 | |
Thereafter | 15,545 | |
Total undiscounted future minimum lease payments | 32,353 | |
Discount | (3,703) | |
Total operating lease liabilities | $ | 28,650 | |
The weighted-average discount rate and remaining lease term for operating leases at December 31, 2023 were as follows:
| | | | | |
Weighted-average discount rate | 2.43 | % |
Weighted-average remaining lease term (years) | | | | | | | |
| | | | | | | 9.3 |
|
| | | | | | | | | | | | | | | |
| 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 components of total lease costs for operating leases were as follows: | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
(Dollars in thousands) | | | | | 2023 | | 2022 |
Lease expense | | | | | $ | 1,025 | | | $ | 1,014 | |
Short-term and variable lease cost | | | | | (7) | | | 42 | |
| | | | | | | |
Sublease income | | | | | (370) | | | (333) | |
Total lease cost for operating leases | | | | | $ | 648 | | | $ | 723 | |
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTSSTOCKHOLDERS' EQUITY
Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): MeasurementRepurchase of Credit Losses on Financial Instruments
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 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 ASUauthorization is effective for annual reporting periods beginning afterfrom September 3, 2021 through September 30, 2024. On August 25, 2023, the Company's Board of Directors announced a share repurchase program to repurchase up to an additional 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028. During the three months ended December 15, 2019.31, 2023 and 2022, the Company repurchased 232,588 and 653,994 shares, respectively, as part of the share repurchase programs.
Under the repurchase programs, repurchased shares were retired and designated as authorized but unissued shares. The Company accounts for repurchased shares using the par value method under which the repurchase price is currently undertaking a data analysis and is taking measures so that its systems capture data applicablecharged to paid-in capital up 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 assessmentamount of the ASU and expects thatoriginal proceeds of those shares. When the standard will be immaterialrepurchase price is greater than the original issue proceeds, the excess is charged 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 MEASUREMENTS
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
The fair value hierarchy is as follows:
Level 1 Inputs – Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.
Level 2 Inputs – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which significant assumptions are observable in the market.
Level 3 Inputs – Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
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 value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments. The Company’s Level 1 securities include equity securities and mutual funds. Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds and corporate debt securities. The Company had no Level 3 securities at December 31, 2017 or September 30, 2017.
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 asretained earnings. As of December 31, 20172023, 8,433,848 shares of common stock remained available for repurchase.
For the three months ended December 31, 2023 and September 30, 2017.2022, the Company also repurchased 103,641 and 57,291 shares, or $4.9 million and $2.0 million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
|
| | | | | | | | | | | | | | | |
| 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%.
|
Retirement of Treasury Stock. The following table disclosesCompany accounts for the Company’s estimated fairretirement of repurchased shares, including treasury stock, using the par value amounts of its financial instruments asmethod under which the repurchase price is charged to paid-in capital up to the amount of the dates set forth below. Itoriginal proceeds of those shares. When the repurchase price is management’s belief thatgreater than the fair values presented below are reasonable based onoriginal issue proceeds, the valuation techniques and data availableexcess is charged to retained earnings. The Company retired no shares of common stock held in treasury during the Company as ofthree months ended December 31, 20172023 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.2022.
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 ASSETS10. STOCK COMPENSATION
On September 27, 2023, the Board adopted the Pathward Financial, Inc. 2023 Omnibus Incentive Plan (the "2023 Omnibus Incentive Plan") contingent on stockholder approval at the Annual Meeting of Stockholders expected to be held on February 27, 2024. The 2023 Omnibus Incentive Plan permits the granting of various types of awards including but not limited to nonvested (restricted) shares and performance share units ("PSUs") to certain officers and directors of the Company. Awards may be granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.
Shares have previously been granted each year to executives and senior leadership members under the applicable Company incentive plan. These shares vest at various times ranging from immediately to three years based on circumstances at time of grant. The fair value is determined based on the fair market value of the Company’s stock on the grant date. Director shares are issued to the Company’s directors, and these shares have historically vested one year from the grant date.
The Company heldalso grants selected executives and other key employees PSU awards. The vesting of these awards is contingent on meeting company-wide performance goals, including but not limited to return on equity, earnings per share, and total shareholder return. PSUs are generally granted at the market value of the underlying share on the date of grant, adjusted for dividends, as performance share units do not participate in dividends. The awards contingently vest over a totalperiod of $98.7 millionthree years and have payout levels ranging from a threshold of goodwill as50% to a maximum of December 31, 2017. 200%. Upon vesting, each performance share unit earned is converted into one share of common stock.
The recorded goodwill was duefair value of the PSUs is determined by the dividend-adjusted fair value on the grant date for those awards subject to two separate business combinations during fiscal 2015 and two separate business combinationsa performance condition. For those PSUs subject to a market condition, a simulation valuation is performed.
In addition, during the first quarterand second quarters of fiscal 2017. The fiscal 2015 business combinations included $11.6 millionyear 2017, shares were granted to certain executive officers of goodwillthe Company in connection with their signing of employment agreements with the purchaseCompany. These stock awards vest in equal installments over eight years.
The following tables show the activity of share awards (including shares of restricted stock subject to vesting, fully-vested restricted stock, and PSUs) granted, exercised or forfeited under all of the commercial loan portfolio and related assets of AFS/IBEX onCompany's incentive plans during the three months ended December 2, 2014 and $25.4 million of goodwill in connection with31, 2023.
| | | | | | | | |
| Number of Shares | Weighted Average Fair Value at Grant |
Nonvested shares outstanding, September 30, 2023 | 370,151 | | $ | 35.87 | |
Granted(1) | — | | — | |
Vested | (176,700) | | 36.44 | |
Forfeited or expired | (1,863) | | 39.23 | |
Nonvested shares outstanding, December 31, 2023 | 191,588 | | $ | 35.31 | |
| Number of Units(2) | Weighted Average Fair Value at Grant |
Performance share units outstanding, September 30, 2023 | 155,804 | | $ | 41.20 | |
Granted(1) | — | | — | |
Vested | (60,984) | | 55.47 | |
Forfeited or expired | — | | — | |
Performance share units outstanding, December 31, 2023 | 94,820 | | $ | 55.47 | |
(1) While no shares were granted during the first quarter of fiscal year 2024, 150,522 of nonvested shares and 44,800 of target performance share units were issued under awards contingent on the stockholder approval of the 2023 Omnibus Incentive Plan. |
(2) The activity in this table includes 60,984 shares related to the fiscal year 2021 performance share units, which are included in this table under the assumption of a target performance achievement. The final performance was assessed after September 30, 2023, resulted in an achievement greater than target, and an additional 47,252 shares were allocated to the participants in the plan. |
Compensation expense for share-based awards is recorded over the purchase of substantially allvesting period at the fair value 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 withaward at the purchase of substantially alltime of the assetsgrant. The exercise price of EPS Financial, LLC on November 1, 2016;fair value of nonvested (restricted) shares and $31.4 million of goodwill in connection withPSUs granted under the purchase of substantially allCompany’s incentive plans is equal to the fair market value of the assets and specified liabilitiesunderlying stock at the grant date, adjusted for dividends where applicable. The Company has elected to record forfeitures as they occur.
At December 31, 2023, stock-based compensation expense not yet recognized in income totaled $4.1 million, which is expected to be recognized over a weighted average remaining period of Specialty Consumer Services LP on December 14, 2016. The goodwill associated with these transactions is deductible for tax purposes.1.27 years.
NOTE 11. INCOME TAXES
The changes in the carrying amountCompany recorded an income tax expense of the Company’s goodwill and intangible assets$5.7 million for the three 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. There were no impairments to intangible assets during the three months ended December 31, 2017 or 2016. The annual goodwill impairment test for fiscal 2018 will be conducted at September 30, 2018.
NOTE 12. INCOME TAXES
Income tax expense for the fiscal 2018 first quarter was $5.7 million,2023, resulting in an effective tax rate of 54.9%17.00%, compared to $0.3an income tax expense of $6.6 million, or an effective tax rate of 21.6%18.79%, for the three months ended December 31, 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 2024. 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 of $3.6 million. Ascomponents for the periods presented.
| | | | | | | | | | | |
| Three Months Ended December 31, |
(Dollars in thousands) | 2023 | | 2022 |
Provision at statutory rate | $ | 7,009 | | | $ | 7,228 | |
Tax-exempt income | (174) | | | (203) | |
State income taxes | 1,228 | | | 1,510 | |
Interim period effective rate adjustment | 2,806 | | | 1,119 | |
Tax credit investments, net - federal | (4,377) | | | (3,062) | |
| | | |
IRC 162(m) nondeductible compensation | (280) | | | 136 | |
Other, net | (493) | | | (151) | |
Income tax expense | $ | 5,719 | | | $ | 6,577 | |
Effective tax rate | 17.00 | % | | 18.79 | % |
NOTE 12. 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 13. Segment Reporting to the Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Consumer | | Commercial | | Corporate Services/Other | | Consolidated Company |
Three Months Ended December 31, | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 |
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Net interest income(1) | $ | 59,356 | | $ | 34,272 | | | $ | 45,881 | | $ | 42,324 | | | $ | 4,799 | | $ | 7,461 | | | $ | 110,036 | | $ | 84,057 | |
Noninterest income: | | | | | | | | | | | |
Refund transfer product fees | 422 | | 677 | | | — | | — | | | — | | — | | | 422 | | 677 | |
Refund advance fee income(1) | 111 | | 617 | | | — | | — | | | — | | — | | | 111 | | 617 | |
Card and deposit fees | 30,507 | | 37,452 | | | 236 | | 261 | | | 7 | | 5 | | | 30,750 | | 37,718 | |
Rental income(1) | — | | — | | | 13,235 | | 12,515 | | | 224 | | 193 | | | 13,459 | | 12,708 | |
| | | | | | | | | | | |
Gain on sale of trademarks | — | | — | | | — | | — | | | — | | 10,000 | | | — | | 10,000 | |
Gain (loss) on sale of other(1) | (31) | | — | | | 362 | | 502 | | | 2,509 | | — | | | 2,840 | | 502 | |
Other income(1) | 1,778 | | 793 | | | 2,166 | | 1,084 | | | 1,235 | | 1,678 | | | 5,179 | | 3,555 | |
Total noninterest income | 32,787 | | 39,539 | | | 15,999 | | 14,362 | | | 3,975 | | 11,876 | | | 52,761 | | 65,777 | |
Revenue | $ | 92,143 | | $ | 73,811 | | | $ | 61,880 | | $ | 56,686 | | | $ | 8,774 | | $ | 19,337 | | | $ | 162,797 | | $ | 149,834 | |
(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 three months ended December 31, 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 13. 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 table presents segment data for the Company:
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(Dollars in thousands) | Consumer | | Commercial | | Corporate Services/Other | | Total |
Three Months Ended December 31, | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 |
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Net interest income | $ | 59,356 | | $ | 34,272 | | | $ | 45,881 | | $ | 42,324 | | | $ | 4,799 | | $ | 7,461 | | | $ | 110,036 | | $ | 84,057 | |
Provision for (reversal of) credit loss | 3,454 | | 3,240 | | | 6,463 | | 6,583 | | | (27) | | (47) | | | 9,890 | | 9,776 | |
Noninterest income | 32,787 | | 39,539 | | | 15,999 | | 14,362 | | | 3,975 | | 11,876 | | | 52,761 | | 65,777 | |
Noninterest expense | 50,013 | | 34,494 | | | 34,856 | | 32,749 | | | 34,405 | | 37,816 | | | 119,274 | | 105,059 | |
Income (loss) before income tax expense | 38,676 | | 36,077 | | | 20,561 | | 17,354 | | | (25,604) | | (18,432) | | | 33,633 | | 34,999 | |
| | | | | | | | | | | |
Total assets | 563,706 | | 393,898 | | | 4,206,522 | | 3,476,942 | | | 3,157,209 | | 2,788,385 | | | 7,927,437 | | 6,659,225 | |
Total goodwill | 87,145 | | 87,145 | | | 222,360 | | 222,360 | | | — | | — | | | 309,505 | | 309,505 | |
Total deposits | 6,587,052 | | 5,624,919 | | | 3,669 | | 6,628 | | | 345,334 | | 157,585 | | | 6,936,055 | | 5,789,132 | |
NOTE 14. 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 June 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 FDIC finalizedfair values of debt securities available for sale and equity securities as they are measured at fair value on a recurring basis.
| | | | | | | | | | | | | | |
| At December 31, 2023 |
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
Debt securities AFS | | | | |
Corporate securities | $ | 18,375 | | | $ | 18,375 | | |
SBA securities | 87,732 | | — | | 87,732 | | — | |
Obligations of states and political subdivisions | 2,304 | | — | | 2,304 | | — | |
Non-bank qualified obligations of states and political subdivisions | 228,888 | | — | | 228,888 | | — | |
Asset-backed securities | 237,704 | | — | | 237,704 | | — | |
Mortgage-backed securities | 1,275,578 | | — | | 1,275,578 | | — | |
Total debt securities AFS | $ | 1,850,581 | | $ | — | | $ | 1,850,581 | | $ | — | |
Common equities and mutual funds(1) | $ | 4,207 | | $ | 4,207 | | $ | — | | $ | — | |
Non-marketable equity securities(2) | $ | 9,700 | | $ | — | | $ | — | | $ | — | |
(1) Equity securities at fair value are included within other assets on the FAQs. The Company believesCondensed Consolidated Statements of Financial Condition at December 31, 2023.
(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, 2023 |
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
Debt securities AFS | | | | |
Corporate securities | $ | 18,250 | | $ | — | | $ | 18,250 | | $ | — | |
SBA securities | 85,242 | | — | | 85,242 | | — | |
Obligations of states and political subdivisions | 2,289 | | — | | 2,289 | | — | |
Non-bank qualified obligations of states and political subdivisions | 226,723 | | — | | 226,723 | | — | |
Asset-backed securities | 246,199 | | — | | 246,199 | | — | |
Mortgage-backed securities | 1,225,525 | | — | | 1,225,525 | | — | |
Total debt securities AFS | $ | 1,804,228 | | $ | — | | $ | 1,804,228 | | $ | — | |
Common equities and mutual funds(1) | $ | 3,378 | | $ | 3,378 | | $ | — | | $ | — | |
Non-marketable equity securities(2) | $ | 8,389 | | $ | — | | $ | — | | $ | — | |
(1) Equity securities at fair value are included within other assets on the Consolidated Statements of Financial Condition at September 30, 2023.
(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-capitalized44%.
The following tables summarize the assets of the Company that are measured at fair value in the future,Condensed Consolidated Statements of Financial Condition on a nonrecurring basis:
| | | | | | | | | | | | | | |
| At December 31, 2023 |
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
Loans and leases, net individually evaluated for credit loss | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Commercial finance | $ | 6,441 | | $ | — | | $ | — | | $ | 6,441 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total loans and leases, net individually evaluated for credit loss | 6,441 | | — | | — | | 6,441 | |
| | | | |
Total | $ | 6,441 | | $ | — | | $ | — | | $ | 6,441 | |
| | | | | | | | | | | | | | |
| At September 30, 2023 |
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 |
Loans and leases, net individually evaluated for credit loss | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Commercial finance | $ | 21,829 | | $ | — | | $ | — | | $ | 21,829 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total loans and leases, net individually evaluated for credit loss | 21,829 | | — | | — | | 21,829 | |
| | | | |
Total | $ | 21,829 | | $ | — | | $ | — | | $ | 21,829 | |
| | | | | | | | | | | | | | | | | |
| Quantitative Information About Level 3 Fair Value Measurements |
(Dollars in thousands) | Fair Value at December 31, 2023 | Fair Value at September 30, 2023 | Valuation Technique | Unobservable Input | Range of Inputs |
Loans and leases, net individually evaluated for credit loss | $ | 6,441 | | $ | 21,829 | | Market approach | Appraised values(1) | 3% - 44% |
| | | | | |
(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 44%.
Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Condensed Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair value estimates were made at December 31, 2023 and September 30, 2023 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 December 31, 2023 |
(Dollars in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 |
Financial assets | | | | | |
Cash and cash equivalents | $ | 671,630 | | $ | 671,630 | | $ | 671,630 | | $ | — | | $ | — | |
Debt securities available for sale | 1,850,581 | | 1,850,581 | | — | | 1,850,581 | | — | |
Debt securities held to maturity | 35,440 | | 32,180 | | — | | 32,180 | | — | |
Common equities and mutual funds(1) | 4,207 | | 4,207 | | 4,207 | | — | | — | |
Non-marketable equity securities(1)(2) | 20,195 | | 20,195 | | — | | 10,495 | | — | |
Loans held for sale | 69,518 | | 69,518 | | — | | 69,518 | | — | |
Loans and leases | 4,419,364 | | 4,298,218 | | — | | — | | 4,298,218 | |
Federal Reserve Bank and Federal Home Loan Bank stocks | 23,694 | | 23,694 | | — | | 23,694 | | — | |
Accrued interest receivable | 27,080 | | 27,080 | | 27,080 | | — | | — | |
Financial liabilities | | | | | |
| | | | | |
Deposits | 6,936,055 | | 6,937,613 | | 6,795,322 | | 142,292 | | — | |
| | | | | |
| | | | | |
Other short- and long-term borrowings | 33,614 | | 31,421 | | — | | 31,421 | | — | |
Accrued interest payable | 1,941 | | 1,941 | | 1,941 | | — | | — | |
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at December 31, 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, 2023 |
(Dollars in thousands) | Carrying Amount | Estimated Fair Value | Level 1 | Level 2 | Level 3 |
Financial assets | | | | | |
Cash and cash equivalents | $ | 375,580 | | $ | 375,580 | | $ | 375,580 | | $ | — | | $ | — | |
Debt securities available for sale | 1,804,228 | | 1,804,228 | | — | | 1,804,228 | | — | |
Debt securities held to maturity | 36,591 | | 31,425 | | — | | 31,425 | | — | |
Common equities and mutual funds(1) | 3,378 | | 3,378 | | 3,378 | | — | | — | |
Non-marketable equity securities(1)(2) | 20,453 | | 20,453 | | — | | 12,064 | | — | |
Loans held for sale | 77,779 | | 77,779 | | — | | 77,779 | | — | |
Loans and leases | 4,359,681 | | 4,223,010 | | — | | — | | 4,223,010 | |
Federal Reserve Bank and Federal Home Loan Bank stocks | 28,210 | | 28,210 | | — | | 28,210 | | — | |
Accrued interest receivable | 23,282 | | 23,282 | | 23,282 | | — | | — | |
Financial liabilities | | | | | |
Deposits | 6,589,182 | | 6,589,065 | | 6,583,648 | | 5,417 | | — | |
| | | | | |
| | | | | |
Other short- and long-term borrowings | 33,873 | | 31,187 | | — | | 31,187 | | — | |
Accrued interest payable | 247 | | 247 | | 247 | | — | | — | |
(1) Equity securities at fair value are included within other assets on the Company’s liquidity,Consolidated Statements of Financial Condition at September 30, 2023.
(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 14.15. 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 December 31, 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 December 31, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
META FINANCIAL GROUP, 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,” "target," 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; future effective tax rate; the impact of card balances related to government stimulus programs; progress on key initiatives; expected results of our partnerships; 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 changesmilitary conflicts in tax laws; the risk that the Bank may be unable to originate between $500 million 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,Ukraine and the strength ofMiddle East, weather-related disasters, or public health events, such as the local economies in which the Company conducts operations; the effects of,COVID-19 pandemic, and any governmental or societal responses thereto; our ability to achieve brand recognition for Pathward equal to or greater than we enjoyed for MetaBank; our ability to successfully implement measures designed to reduce expenses and increase 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; our liquidity and capital positions, including the sufficiency of our liquidity; 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 and acceptance 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”;well capitalized; 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, 20172023, 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 that has elected to be a financial holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank.chartered national bank, the accounts of which are insured up to applicable limits by the FDIC as administrator of the Deposit Insurance Fund. 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, 2017,2023, compared to September 30, 2017,2023, and the consolidated results of operations for the three months ended December 31, 20172023 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, 20172023 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, 2017.2023.
BUSINESS DEVELOPMENTSEXECUTIVE SUMMARY
Company Highlights
•On January 9, 2018,16, 2024, 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. As of September 30, 2017, the Bank had $5.2 billion in assets and $1.3 billion in total loans and, 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 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.
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 workingmulti-year extension with a broadlong-standing partner that allows for collaboration on product innovation and expanded product offerings for a range of industries, including manufacturing, transportationprograms in market and health care. Crestmark will operate as a division of MetaBank and will continue to operate from its offices in Troy, Michigan.under development.
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
Financial Highlights for the Company into a direct-to-consumer credit business.2024 Fiscal First Quarter
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,•Total revenue for the three months ended December 31, 2017, compared to net income of $1.2first quarter was $162.8 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$13.0 million, or 32%9%, 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, as well as the purchased floating rate student loans. Also contributing to 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 in the overall interest-earning asset mix.
Card fee income increased $6.8 million, or 37%, for the 2018 fiscal first quarter when compared to the same quarter in 2017. Thisfiscal 2023, driven by an increase was duein net interest income, partially offset by a decrease in noninterest income.
•Net interest margin ("NIM") increased 61 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 million6.23% for the three months endedfirst quarter from 5.62% 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 December 31, 20162023 increased $916.6 million to $2.1 million for the three months ended$4.43 billion compared to December 31, 2017. This2022 and increased $60.2 million when compared to September 30, 2023. The increase compared to the prior year quarter was primarily due to growth in the volume of pre-seasoncommercial, consumer, and warehouse finance loan portfolios. The primary driver for the sequential increase was growth in seasonal consumer finance loans related to a tax advance loans originated duringpartnership.
•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 20182024 fiscal first quarter, average assets grew to $4.12 billion, compared to $3.49 billion 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 was partially offset by an $11.6 million decrease, or a 12% decrease, in total agricultural loans. Excluding all purchased student loan portfolios and refund advance loans, total loans receivable, net of allowance for loan losses, at December 31, 2017 were up $293.1 million, or 30%, compared to the same period of the prior year. At December 31, 2017, community banking loans 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 when 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. The increase in NPAs was primarily related to a large, well-collateralized agricultural loan relationship being more than 90 days past due, which was still accruing at December 31, 2017. On January 2, 2018, a deed in lieu of foreclosure was executed on the collateral for this relationship upon which the Company took ownershiprepurchased 232,588 shares 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 endcommon stock at an average share price 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. The decrease in NPAs from September 30, 2017 to December 30, 2017 was primarily due to the payoff of a $7.0 million nonperforming agricultural loan relationship during the first quarter of fiscal 2018.$47.25.
FINANCIAL CONDITION
At December 31, 2017,2023, the Company’s total assets increased by $189.6 million, or 4%, to $5.42$7.93 billion compared to $5.23 billion at September 30, 2017. The increase in assets was2023, primarily due to an increasegrowth of $296.0 million in cash and cash equivalents, $60.2 million in total loans receivable.and leases, and $46.4 million in securities AFS, partially offset by a reduction of $11.8 million in other assets.
Total cash and cash equivalents were $1.30 billion$671.6 million at December 31, 2017, an increase of $32.82023, increasing from $375.6 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.
2023. 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 December 31, 2023, the Company did not have any federal funds sold.
The total of mortgage-backed securities (“MBS”) and investment securities decreased $21.1portfolio increased $45.2 million, or 1%2%, to $2.24$1.89 billion at December 31, 2017,2023, compared to $2.26$1.84 billion at September 30, 2017, as maturities, sales, and principal pay downs exceeded purchases.2023. 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. Of the total MBS, $600.1 million were classified as available for sale,less, and $8.5 million were classified as held to maturity. Of the total investmentother tax exempt municipal mortgage related pass through securities $1.39 billion were classified as available for sale and $235.0 million were classified as held to maturity.which have average lives much shorter than their stated final maturities. During the three month periodmonths ended December 31, 2017,2023, the Company purchased $105.3 millionmade no purchases of investment securities available for sale, no MBS securities, and no investment securities held to maturity, withsecurities.
Through 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,Bank, the Company early adopted Accounting Standard Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Dueowns stock in the FHLB due to the early adoptionBank’s membership and participation in this banking system as well as stock in the FRB. The FHLB requires a level of the ASU, the Company transferred $204.7 million ofstock 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.
based on a pre-determined formula. The Company’s portfolio of net loans receivable increased $182.4investment in these stocks was $23.7 million or 14%, to $1.50 billion at December 31, 2017, from $1.32 billion2023 and $28.2 million at September 30, 2017. This increase was primarily attributable to a $112.0 million increase in consumer loans, largely due to the student loan portfolio2023, as redemptions were partially offset by purchases and refund advance loans, a $68.5 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,of FHLB membership stock during the three months ended December 31, 2017. Excluding the purchased student loan portfolios and refund advances, total loans receivable, net of allowance2023.
Loans held for loan losses, would have increased $72.2 million, or 6%, from September 30, 2017 to December 31, 2017. Community banking loans increased $61.5 million, or 7%, during this period. Of the $654.0 million in commercial and multi-family real estate loanssale at December 31, 2017, $129.92023 totaled $69.5 million, were considered high-volatility commercial real estate (“HVCRE”) loans. While such HVCRE loans are risk-weighteddecreasing from $77.8 million at 150% rather than 100%, as is customarySeptember 30, 2023. This decrease was primarily driven by a reduction in consumer credit products held 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%,sale at December 31, 2017,2023 compared to $3.51September 30, 2023.
Total gross loans and leases totaled $4.43 billion from $3.22at December 31, 2023, as compared to $4.37 billion at September 30, 2017, primarily related to2023. The primary drivers for the increase was an increase of $325.6 million in non-interest bearing deposits, an increase of $17.1 million in interest-bearing checking depositsseasonal consumer finance loans, seasonal tax services loans and a $4.6 million increase in certificates of deposit. The increase in total deposits wascommercial finance loans, partially offset by a decrease of $55.8 million in wholesale deposits. Deposits attributablewarehouse finance loans. See Note 4 to the Payments segment“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 $3.73 billion at December 31, 2023, reflecting an increase of $11.4 million from September 30, 2023. The increase in commercial finance loans was primarily driven by a $144.1 million increase in the term lending portfolio and a $21.3 million increase in the SBA/USDA portfolio, partially offset by a $129.0 million decrease in the insurance premium finance portfolio.
Total end-of-period deposits increased by $331.8 million, or 14%,5% to $2.77$6.94 billion at December 31, 2017,2023, compared to $2.44$6.59 billion at September 30, 2017. The average balance2023, primarily driven by increases in noninterest-bearing deposits of total$215.9 million and wholesale deposits and interest-bearing liabilities was $3.62 billion for the three month period endedof $135.7 million, partially offset by a decrease in savings deposits of $4.9 million.
As of December 31, 2017, compared2023, the Company had $837.6 million in deposits related to $3.06 billionforgovernment stimulus programs. Of the same period intotal amount of government stimulus program deposits, $334.5 million are on activated cards while $503.1 million are on inactivated cards. During the prior year. The average balanceremainder of non-interest bearing deposits forfiscal year 2024, the three month period ended December 31, 2017 increased by$272.3inactive deposit balances are expected to decline by approximately $310 million or 13%, to $2.33 billion, comparedas the Company actively returns unclaimed balances to the same period in the prior year.U.S. Treasury.
TotalThe Company's total borrowings decreased $91.1$13.3 million or 6%, from $1.49 billion$46.9 million at September 30, 20172023 to $1.40 billion$33.6 million at December 31, 2017,2023, primarily due todriven by a decrease in short-term borrowings of federal funds purchased. At September 30, 2017 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.$13.0 million.
At December 31, 2017,2023, the Company’s stockholders’ equity totaled $437.7$729.3 million, an increase of $3.2$78.7 million, from $434.5$650.6 million at September 30, 2017.2023. The increase was primarily attributable to net earnings and an increase in additional paid-in capital, offset by accumulated other comprehensive income and cash dividends paid. Atretained earnings. The Company and Bank remained above the federal regulatory minimum capital requirements at December 31, 2017, the Bank2023, and continued to exceed allbe classified as well-capitalized, and in good standing with the regulatory requirements for classification as a well‑capitalized institution.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 Allowanceare 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 Loan Lossesall 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) | December 31, 2023 | | September 30, 2023 |
Noninterest-bearing deposits | $ | 6,876,657 | | | $ | 6,608,137 | |
Prefunding | (266,820) | | | (230,749) | |
Discount funding | (51,490) | | | (34,351) | |
DDA overdrafts | (9,528) | | | (10,096) | |
Noninterest-bearing checking, net | $ | 6,548,819 | | | $ | 6,332,941 | |
Generally,
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 majoritybenefit 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.
As of December 31, 2023, the Company managed $1.1 billion of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn servicing fee income, typically reflective of the EFFR.
RESULTS OF OPERATIONS
The following table presents, 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 yields on interest-bearing assets and NIM. Nonaccruing loans and leases have been included in the table as loans or leases carrying a zero yield.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
| 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 | $ | 337,975 | | $ | 4,103 | | 4.83 | % | | $ | 226,004 | | $ | 1,716 | | 3.01 | % |
Mortgage-backed securities | 1,486,854 | | 10,049 | | 2.69 | % | | 1,571,022 | | 10,412 | | 2.63 | % |
Tax exempt investment securities | 136,470 | | 930 | | 3.43 | % | | 154,754 | | 980 | | 3.18 | % |
Asset-backed securities | 250,172 | | 3,565 | | 5.67 | % | | 155,988 | | 1,149 | | 2.92 | % |
Other investment securities | 284,625 | | 2,288 | | 3.20 | % | | 301,739 | | 2,407 | | 3.17 | % |
Total investments | 2,158,121 | | 16,832 | | 3.15 | % | | 2,183,503 | | 14,948 | | 2.76 | % |
Commercial finance | 3,762,910 | | 75,345 | | 7.97 | % | | 3,010,868 | | 58,100 | | 7.66 | % |
Consumer finance | 362,935 | | 10,585 | | 11.60 | % | | 198,372 | | 4,313 | | 8.63 | % |
Tax services | 28,050 | | (11) | | (0.16) | % | | 25,230 | | 57 | | 0.90 | % |
Warehouse finance | 381,931 | | 9,044 | | 9.42 | % | | 290,454 | | 5,926 | | 8.09 | % |
Total loans and leases | 4,535,826 | | 94,963 | | 8.33 | % | | 3,524,924 | | 68,396 | | 7.70 | % |
Total interest-earning assets | 7,031,922 | | $ | 115,898 | | 6.57 | % | | 5,934,431 | | $ | 85,060 | | 5.70 | % |
Noninterest-earning assets | 543,418 | | | | | 589,580 | | | |
Total assets | $ | 7,575,340 | | | | | $ | 6,524,011 | | | |
| | | | | | | |
Interest-bearing liabilities: | | | | | | | |
Interest-bearing checking | $ | 426 | | $ | — | | 0.34 | % | | $ | 447 | | $ | — | | 0.33 | % |
Savings | 54,783 | | 6 | | 0.04 | % | | 62,607 | | 6 | | 0.04 | % |
Money markets | 183,255 | | 576 | | 1.25 | % | | 138,872 | | 78 | | 0.22 | % |
Time deposits | 5,517 | | 4 | | 0.25 | % | | 7,199 | | 2 | | 0.11 | % |
Wholesale deposits | 211,281 | | 2,940 | | 5.54 | % | | 5,712 | | 56 | | 3.89 | % |
Total interest-bearing deposits | 455,262 | | 3,526 | | 3.08 | % | | 214,837 | | 142 | | 0.26 | % |
Overnight fed funds purchased | 117,153 | | 1,656 | | 5.62 | % | | 24,783 | | 244 | | 3.91 | % |
| | | | | | | |
Subordinated debentures | 19,600 | | 357 | | 7.24 | % | | 19,593 | | 357 | | 7.22 | % |
Other borrowings | 14,178 | | 323 | | 9.07 | % | | 15,817 | | 260 | | 6.53 | % |
Total borrowings | 150,931 | | 2,336 | | 6.16 | % | | 60,193 | | 861 | | 5.67 | % |
Total interest-bearing liabilities | 606,193 | | 5,862 | | 3.85 | % | | 275,030 | | 1,003 | | 1.45 | % |
Noninterest-bearing deposits | 6,102,927 | | — | | — | % | | 5,421,821 | | — | | — | % |
Total deposits and interest-bearing liabilities | 6,709,120 | | $ | 5,862 | | 0.35 | % | | 5,696,851 | | $ | 1,003 | | 0.07 | % |
Other noninterest-bearing liabilities | 210,469 | | | | | 178,789 | | | |
Total liabilities | 6,919,589 | | | | | 5,875,640 | | | |
Shareholders' equity | 655,751 | | | | | 648,371 | | | |
Total liabilities and shareholders' equity | $ | 7,575,340 | | | | | $ | 6,524,011 | | | |
Net interest income and net interest rate spread including noninterest-bearing deposits | | $ | 110,036 | | 6.22 | % | | | $ | 84,057 | | 5.63 | % |
| | | | | | | |
Net interest margin | | | 6.23 | % | | | | 5.62 | % |
Tax-equivalent effect | | | 0.01 | % | | | | 0.02 | % |
Net interest margin, tax-equivalent(2) | | | 6.24 | % | | | | 5.64 | % |
(1) Tax rate used to arrive at the TEY for the three months ended December 31, 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.
General
The Company recorded net income of $27.7 million, or $1.06 per diluted share, for the three months ended December 31, 2023, compared to net income of $27.8 million, or $0.98 per diluted share, for the three months ended December 31, 2022.
Net Interest Income
Net interest income for the first quarter of fiscal 2024 was $110.0 million, an increase of 31% from the same quarter in fiscal 2023. The increase was mainly attributable to increased yields, higher interest-earning asset balances and an improved earning asset mix.
The Company’s average interest-earning assets for the first quarter of fiscal 2024 increased by $1.10 billion to $7.03 billion compared to the same quarter in fiscal 2023, primarily due to growth in loans and leases and an increase in cash balances, partially offset by a decrease in total investment security balances. Thefirst quarter average outstanding balance of loans and leases increased $1.01 billion compared to the same quarter of the prior fiscal year, primarily due to an increase in commercial, consumer, and warehouse finance portfolios.
Fiscal 2024 first quarter NIM increased to 6.23% from 5.62% in the first fiscal quarter of last year. The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increased 87 basis points to 6.57% compared to the prior year quarter, driven by an increase in loan segments,and lease, investment securities and cash yields. The yield on the loan and lease portfolio was 8.33% compared to 7.70% for the comparable period last year and the TEY on the securities portfolio was 3.15% compared to 2.76% over that same period.
The Company's cost of funds for all deposits and borrowings averaged 0.35% during the fiscal 2024 first quarter, as compared to 0.07% during the prior year quarter. The Company's overall cost of deposits was 0.21% in the fiscal first quarter of 2024, as compared to 0.01% during the prior year quarter.
Provision for Credit Loss
The Company recognized a provision for credit loss of $9.9 million for the quarter ended December 31, 2023, compared to $9.8 million for the comparable period in the prior fiscal year. Net charge-offs were $5.5 millionfor the quarter ended December 31, 2023, compared to $3.2 million for the quarter ended December 31, 2022. Net charge-offs attributable to the commercial finance, tax services, and consumer finance portfolios for the current quarter were $4.6 million, $0.8 million, and $0.1 million, respectively. Net charge-offs attributable to the commercial finance, tax services, and consumer finance portfolios for the same quarter of the prior year were $2.0 million, $1.0 million, and $0.2 million, respectively.
Noninterest Income
Fiscal 2024 first quarter noninterest income decreased 20% to $52.8 million, compared to $65.8 million for the same period of the prior year. The decrease was primarily attributable to the $10.0 million gain on sale of trademarks recognized during the prior year period, along with a decrease in card and deposit fees. The period-over-period decreasewas partially offset by increases in gain on sale of other, other income, and rental income. The increase in gain on sale of other was driven by a $2.5 million gain related to an investment in the Pathward Venture Capital business.
The decrease in card and deposit fee income was primarily related to servicing fee income on off-balance sheet deposits, which totaled $5.1 millionduring the 2024 fiscal first quarter, as compared to $7.8 million for the fiscal quarter ended September 30, 2023 and $12.9 millionfor the same period of the prior year. The decrease in servicing fee income was due to a reduction in off-balance sheet deposits that the Company manages at other banks.
Noninterest Expense
Noninterest expense increased 14% to $119.3 million for the fiscal 2024 first quarter, from $105.1 million for the same quarter last year. The increase was primarily attributable to increases in card processing expense, compensation and benefits expense, other expense, operating lease equipment depreciation, and occupancy and equipment expense. The period-over-period increase was partially offset by a decrease in legal and consulting expense.
The card processing expense increase was due to rate-related 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 is based on a percentage of the Effective Federal Funds Rate ("EFFR") and reprices immediately upon a change in the EFFR. Approximately 53% of the deposit portfolio was subject to these rate-related processing expenses during the 2024 fiscal first quarter. For the fiscal quarter ended December 31, 2023, contractual, rate-related processing expenses were $26.8 million, as compared to $22.5 million for the fiscal quarter ended September 30, 2023 and $14.0 million for the fiscal quarter ended December 31, 2022.
Income Tax Expense
The Company recorded an income tax expense of $5.7 million, representing an effective tax rate of 17.0%, for the fiscal 2024 first quarter, compared to $6.6 million, representing an effective tax rate of 18.8%, for the first quarter last fiscal year. The current quarter decrease in income tax expense compared to the prior year quarter was primarily due to an increase in investment tax credits recognized ratably.
The Company originated $12.2 million in renewable energy leases during the fiscal 2024 first quarter, resulting in $4.4 million in total net investment tax credits. During the first quarter of fiscal 2023, the Company originated $11.4 million in renewable energy leases resulting in $3.1 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.
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 generally charged-off when collection of principal becomes doubtful, the Company willdoubtful. Typically, this is associated with a delay or shortfall in payments of 210 days or more for 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 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. 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 modifications or loans and leases on nonaccrual status.
The Company believes that the level of allowance for loancredit losses at December 31, 20172023 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-performingthe Company's nonperforming assets.
| | | | | | | | | | | |
(Dollars in thousands) | December 31, 2023 | | September 30, 2023 |
Nonperforming Loans and Leases | | | |
Nonaccruing loans and leases: | | | |
Commercial finance | $ | 28,099 | | | $ | 37,372 | |
| | | |
| | | |
| | | |
Total nonaccruing loans and leases | 28,099 | | | 37,372 | |
| | | |
Accruing loans and leases delinquent 90 days or more: | | | |
Loans held for sale | 661 | | | 306 | |
| | | |
Commercial finance | 7,862 | | | 11,242 | |
Consumer finance | 2,859 | | | 2,210 | |
Tax services(1) | — | | | 5,082 | |
| | | |
Total accruing loans and leases delinquent 90 days or more | 11,382 | | | 18,840 | |
Total nonperforming loans and leases | 39,481 | | | 56,212 | |
| | | |
Other Assets | | | |
Nonperforming operating leases | 2,785 | | | 1,764 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total other assets | 2,785 | | | 1,764 | |
Total nonperforming assets | $ | 42,266 | | | $ | 57,976 | |
Total as a percentage of total assets | 0.53 | % | | 0.77 | % |
(1) Certain tax services loans do not bear interest. | | | |
The Company's nonperforming assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.
|
| | | | | | | |
| Non-Performing Assets As Of |
| 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 endedat December 31, 2017, the Company had $1.1 million of loans modified as troubled debt restructurings ("TDRs") and no loans modified as TDRs during the three-month period ended September 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 $42.4 million, representing 2.19%0.53% of total loans,assets, compared to $37.6$58.0 million, or 2.83%0.77% of total loansassets at September 30, 2017. This2023. The decrease in non-performing loansthe nonperforming assets as a percentage of total assets at December 31, 2023 compared to September 30, 2023, was primarily duedriven by paydowns within the commercial finance portfolio.
The Company's nonperforming loans and leases at December 31, 2023 were $39.5 million, representing 0.88% of total gross loans and leases, compared to the payoff$56.2 million, or 1.26% of a $7.0 million nonperforming agricultural loan relationship during the first quarter of fiscal 2018.total gross loans and leases at September 30, 2023.
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, 2017,2023, the Company had classified $40.4loans and leases of $197.7 million of its assets as substandard, and did not classify any assets$10.1 million as doubtful orand none as loss. At September 30, 2017,2023, the Company classified $40.6loans and leases of $208.2 million of its assets as substandard, and did not classify any assets$8.2 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 modifications 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 $53.8 million at December 31, 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$49.7 million at September 30, 2017. This2023. The increase wasin the ACL at December 31, 2023, when compared to September 30, 2023, was primarily due to a $2.0 million increase in the additional provision expenseallowance related to loans originated by our tax services divisions. During the three months ended December 31, 2017, the Company recorded a provision for loan losses of $1.1 million, partially offset by $0.3 million of net recoveries, compared to $0.1 millionof net charge offs for 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 loanconsumer finance portfolio and other factors, the level ofa $1.6 million increase in the allowance for loan lossesrelated to the commercial finance portfolio.
The following table presents the Company's ACL as a percentage of its total loans and leases.
| | | | | | | | | | | | | | | | | |
| As of the Period Ended |
| December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 |
Commercial finance | 1.30 | % | 1.26 | % | 1.35 | % | 1.53 | % | 1.62 | % |
Consumer finance | 1.45 | % | 0.92 | % | 0.92 | % | 1.99 | % | 1.54 | % |
Tax services | 1.52 | % | 0.04 | % | 70.20 | % | 53.77 | % | 2.01 | % |
Warehouse finance | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % |
Total loans and leases | 1.22 | % | 1.14 | % | 2.01 | % | 2.27 | % | 1.50 | % |
Total loans and leases excluding tax services | 1.21 | % | 1.14 | % | 1.21 | % | 1.40 | % | 1.50 | % |
The Company's ACL as a percentage of total loans and leases increased to 1.22% at December 31, 2017 reflected2023 from 1.14% at September 30, 2023. The increase in the total loans and leases coverage ratio was primarily driven by an increase in the consumer finance portfolio due to seasonal activity and an increase in the seasonal tax services portfolio. 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,2023. 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 quarterthree months of fiscal 2018 compared to the first quarter2024.
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, 2017,2023, the Company had unfunded loan and lease commitments to originate and purchase loans and unused lines of credit totaling $349.5 million. The Company$1.51 billion. Management believes that loan repaymentsrepayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.
In July 2013, The liquidity sources as of December 31, 2023 include $1.1 billion in off-balance sheet deposits and $672 million in cash and cash equivalents. When factoring in additional resources, such as the Company’s primary federal regulator,Federal Home Loan Bank, the Federal Reserve Discount Window and other unsecured funding and wholesale options, the Bank’s primary federal regulator, the OCC, approved final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. Company has over $3.8 billion in total available liquidity as of December 31, 2023.
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 usCompany and the Bank as comparedare required to U.S. general risk-based capital rules. The Basel III Capital Rules revisedcomply with the definitions and the components of regulatory capital as well as addressed other issues affecting the numerator inrules administered by federal 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 Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.
Pursuant to the Basel III Capital Rules, the Company and 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.agencies (the "Capital 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, both2023, 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 tablestable below includeincludes certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis.
|
| | | | | | | | | | | |
| | | | | | | Minimum |
| | | | | | | 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 certainanalyses and has included this non-GAAP financial measures usedinformation, and corresponding reconciliation to compute certaintotal equity.
| | | | | | | | | | | | | | |
| Company | Bank | Minimum to be Adequately Capitalized Under Prompt Corrective Action Provisions | Minimum to be Well Capitalized Under Prompt Corrective Action Provisions |
At December 31, 2023 | | | | |
Tier 1 leverage capital ratio | 7.96 | % | 8.15 | % | 4.00 | % | 5.00 | % |
Common equity Tier 1 capital ratio | 11.43 | | 11.97 | | 4.50 | | 6.50 | |
Tier 1 capital ratio | 11.69 | | 11.97 | | 6.00 | | 8.00 | |
Total capital ratio | 13.12 | | 13.01 | | 8.00 | | 10.00 | |
At September 30, 2023 | | | | |
Tier 1 leverage capital ratio | 8.11 | % | 8.32 | % | 4.00 | % | 5.00 | % |
Common equity Tier 1 capital ratio | 11.25 | | 11.81 | | 4.50 | | 6.50 | |
Tier 1 capital ratio | 11.50 | | 11.81 | | 6.00 | | 8.00 | |
Total capital ratio | 12.84 | | 12.76 | | 8.00 | | 10.00 | |
|
| | | |
| 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 usedthe amounts included in calculating tangible book value data to Total Stockholders' Equity.the table above for the Company. |
| | | |
| 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 |
|
| | | | | | | | | | | |
| Standardized Approach(1) |
(Dollars in thousands) | December 31, 2023 | | September 30, 2023 |
Total stockholders' equity | $ | 729,282 | | | $ | 650,625 | |
Adjustments: | | | |
LESS: Goodwill, net of associated deferred tax liabilities | 297,283 | | | 297,679 | |
LESS: Certain other intangible assets | 20,093 | | | 21,228 | |
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards | 20,253 | | | 19,679 | |
LESS: Net unrealized (losses) on available for sale securities | (187,901) | | | (254,294) | |
LESS: Noncontrolling interest | (510) | | | (1,005) | |
ADD: Adoption of Accounting Standards Update 2016-13 | 1,345 | | | 2,017 | |
Common Equity Tier 1(1) | 581,409 | | | 569,355 | |
Long-term borrowings and other instruments qualifying as Tier 1 | 13,661 | | | 13,661 | |
Tier 1 minority interest not included in common equity Tier 1 capital | (410) | | | (826) | |
Total Tier 1 capital | 594,660 | | | 582,190 | |
Allowance for credit losses | 53,037 | | | 47,960 | |
Subordinated debentures, net of issuance costs | 19,617 | | | 19,591 | |
Total capital | $ | 667,314 | | | $ | 649,741 | |
(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. |
Due to the predictable, quarterly cyclicality of MPS deposits in conjunction with tax season business activity, management believes that a six-month capital calculation is a useful metric to monitor 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 as of December 31, 2017 were 9.75%, 18.17%, 18.17%, and 18.60%, respectively.
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, 20172023 for a summary of our contractual obligations as of September 30, 2017.2023. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 20172023 through December 31, 2017.2023.
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
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 reducegenerally does not have an offsetting reduction as it does not pay interest costs associated withon these deposits, which thereby compresses the Company’s net interest margin. Asdeposits. However, a resultportion 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,applicable rate index and generally has not emphasized longer-term time deposit products.would likely lower card processing expenses.
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 to 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 processCompany's IRR analysis is designed to compare income and economic valuation simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as well as the slope of the yield curve. 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 tied to card processing expense derived from contractual agreements with certain BaaS partners and servicing fees the Company recognizes from custodial off-balance sheet deposits. 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,IRR, 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, 2017:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | 7,046,067 | | | 423,779 | | 454,633 | | 485,679 | | 516,113 | | 546,547 | | 576,838 | | 607,403 | |
Total interest-sensitive expense | 387,572 | | | 7,504 | | 8,606 | | 10,339 | | 12,515 | | 14,708 | | 16,918 | | 19,139 | |
Net interest-sensitive income | | | 416,275 | | 446,027 | | 475,340 | | 503,598 | | 531,839 | | 559,920 | | 588,264 | |
| | | | | | | | | |
Percentage change from base | | | -12.4 | % | -6.2 | % | — | % | 5.9 | % | 11.9 | % | 17.8 | % | 23.8 | % |
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, 20172023, 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, 2017:2023:
| | | | | | | | | | | | | | | | | | | | |
Economic Value Sensitivity | | | | | | |
| Standard (Parallel Shift) |
| Economic Value of Equity at Risk % |
| -200 | -100 | +100 | +200 | +300 | +400 |
Percentage change from base | -11.2 | % | -4.7 | % | 3.6 | % | 6.5 | % | 8.9 | % | 11.7 | % |
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, 20172023 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 valuenoninterest-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 December 31, 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 December 31, 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.
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, 2017,2023 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 no 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) during the fiscal first 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.
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, 2017.2023. There were no material changes to those risk factors during the three months ended December 31, 2017, except2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities.
On September 3, 2021, the Company's Board of Directors authorized a 6,000,000 share repurchase program that the following risk factors are hereby added:
There are risks associated with the proposed transaction with Crestmarkwas publicly announced on September 7, 2021 and Crestmark Bank, including the receiptis scheduled to expire on September 30, 2024. The Company's Board of required shareholderDirectors authorized an additional 7,000,000 share repurchase program that was publicly announced on August 25, 2023 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.is scheduled to expire September 30, 2028. The transaction remains subject to approval of our stockholders and Crestmark’s shareholders, regulatory approvals and 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 pricetable below sets forth information regarding repurchases of our common stock during the fiscal 2024 first quarter.
| | | | | | | | | | | | | | |
Period | Total Number of Shares Repurchased(1) | Average Price Paid per Share(1)(2) | Total Number Of Shares Purchased As Part of Publicly Announced Plans or Programs | Maximum Number Of Shares that may yet be Purchased Under the Plans or Programs |
October 1 to 31 | 293,640 | | $ | 47.14 | | 232,588 | | 8,433,848 | |
November 1 to 30 | 42,589 | | 47.85 | | — | | 8,433,848 | |
December 1 to 31 | — | | — | | — | | 8,433,848 | |
Total | 336,229 | | | 232,588 | | |
(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 our operating results. Furthermore,excludes commissions and other transaction expenses.
Item 5. Other Information
Adoption or Termination of Trading Arrangements by Directors and Executive Officers
During 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 pricefiscal quarter ended December 31, 2023, none of our common stock caused by the sale of such stock held by former Crestmark shareholders following the transaction.
Anydirectors or officers (as defined in Rule 16a-1(f) 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 SEC in connection with the proposed transaction.
Program agreements that the Company and the Bank have entered into, and expect to enter into from time to time in 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 Analysis 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 group or other third party were to bring an action against the Bank or any1934 Act) informed us of the third parties with which the Bank operates such lending programs, suchadoption or termination of any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as Liberty, and such actions were successful, such an outcome could have a material adverse effect on the Bank and the Company.those terms are defined in Item 408 of Regulation S-K.
Agreements with Liberty Lending and others whereby the Bank will originate and hold unsecured consumer loans, may result in increased exposure to credit risk and fraud and may present certain additional risks.
Although the Bank has offered unsecured consumer loans to its customers through its brick-and-mortar branch network, the Bank’s entry into program agreements with other third parties to market and service loans originated by the Bank, such as its recently announced program agreement with Liberty, represents a new area
Item 6. Exhibits.
| | | | | |
Exhibit Number | Description |
Exhibit
| Description |
| |
| AgreementOffer Letter between the Company and Plan of Merger,Gregory Sigrist, dated as of January 9, 2018, by and among Meta Financial Group, Inc., MetaBank, Crestmark Bancorp, Inc. and Crestmark Bank,October 2, 2023, filed on January 9, 2018October 5, 2023 as an exhibit to the Registrant’sRegistrant'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 | The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 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.INS | Instance Document
104 | |
101.SCH | 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). |
*Management contract or compensatory plan or agreement.
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, 20188, 2024 | 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, 20188, 2024 | By: | /s/ Glen W. HerrickGregory A. Sigrist |
| | Glen W. Herrick, Gregory A. Sigrist, |
| | Executive Vice President |
| | and Chief Financial Officer |