Docoh
Loading...

CASH Meta Financial

Filed: 6 May 21, 4:18pm
0000907471cash:CommunityBankingLoansMemberus-gaap:NonperformingFinancingReceivableMemberus-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember2020-09-30


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

For the transition period from           to           .

Commission File Number:  0-22140

cash-20210331_g1.jpg
META FINANCIAL GROUP INC.®
(Exact name of registrant as specified in its charter)
Delaware42-1406262
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

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

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


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

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes   No





Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company See the definitions of "large accelerated filer." "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filerAccelerated
filer
Non-accelerated
filer
Smaller reporting
company
Emerging growth
company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class:Outstanding at May 3, 2021:
Common Stock, $.01 par value31,925,179 Shares
Nonvoting Common Stock, $.01 par valueNonvoting shares





META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents

i



PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Share and Per Share Data)March 31, 2021September 30, 2020
ASSETS(Unaudited)(Audited)
Cash and cash equivalents$3,724,242 $427,367 
Investment securities available for sale, at fair value921,947 814,495 
Mortgage-backed securities available for sale, at fair value558,833 453,607 
Investment securities held to maturity, at cost67,709 87,183 
Mortgage-backed securities held to maturity, at cost4,403 5,427 
Loans held for sale67,635 183,577 
Loans and leases3,657,531 3,322,765 
Allowance for credit losses(98,892)(56,188)
Federal Reserve Bank and Federal Home Loan Bank stocks, at cost28,433 27,138 
Accrued interest receivable17,429 16,628 
Premises, furniture, and equipment, net41,510 41,608 
Rental equipment, net211,397 205,964 
Bank-owned life insurance93,542 92,315 
Foreclosed real estate and repossessed assets. net1,483 9,957 
Goodwill309,505 309,505 
Intangible assets36,903 41,692 
Prepaid assets10,201 8,328 
Deferred taxes, net25,435 17,723 
Other assets110,877 82,983 
Total assets$9,790,123 $6,092,074 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
LIABILITIES 
Deposits:
Noninterest-bearing checking7,928,235 4,356,630 
Interest-bearing checking416,164 157,571 
Savings deposits126,834 47,866 
Money market deposits55,045 48,494 
Time certificates of deposit12,614 20,223 
Wholesale deposits103,521 348,416 
Total deposits8,642,413 4,979,200 
Short-term borrowings
Long-term borrowings95,336 98,224 
Accrued interest payable679 1,923 
Accrued expenses and other liabilities216,437 165,419 
Total liabilities8,954,865 5,244,766 
STOCKHOLDERS’ EQUITY  
Preferred stock, 3,000,000 shares authorized, 0 shares issued and 0 shares outstanding at March 31, 2021 and September 30, 2020, respectively
Common stock, $0.01 par value; 90,000,000 shares authorized, 32,128,403 and 34,479,164 shares issued, 31,926,008 and 34,360,890 shares outstanding at March 31, 2021 and September 30, 2020, respectively319 344 
Common stock, Nonvoting, $0.01 par value; 3,000,000 shares authorized, 0 shares issued, NaN outstanding at March 31, 2021 and September 30, 2020, respectively
Additional paid-in capital601,222 594,569 
Retained earnings225,471 234,927 
Accumulated other comprehensive income12,809 17,542 
Treasury stock, at cost, 202,395 and 118,274 common shares at March 31, 2021 and September 30, 2020, respectively(5,655)(3,677)
Total equity attributable to parent834,166 843,705 
Noncontrolling interest1,092 3,603 
Total stockholders’ equity835,258 847,308 
Total liabilities and stockholders’ equity$9,790,123 $6,092,074 
See Notes to Condensed Consolidated Financial Statements.
2




META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,Six Months Ended March 31,
(Dollars in Thousands, Except Share and Per Share Data)2021202020212020
Interest and dividend income:    
Loans and leases, including fees$68,472 $70,493 $130,128 $139,195 
Mortgage-backed securities2,608 2,493 4,730 4,882 
Other investments4,589 6,417 8,956 12,952 
 75,669 79,403 143,814 157,029 
Interest expense:    
Deposits445 8,242 1,241 17,583 
FHLB advances and other borrowings1,374 3,424 2,724 7,058 
 1,819 11,666 3,965 24,641 
Net interest income73,850 67,737 139,849 132,388 
Provision for credit losses30,290 37,296 36,379 40,703 
Net interest income after provision for credit losses43,560 30,441 103,470 91,685 
Noninterest income:    
Refund transfer product fees22,680 28,939 23,327 29,131 
Tax advance product fees44,562 29,536 46,522 31,812 
Payment card and deposit fees29,875 23,156 52,439 44,655 
Other bank and deposit fees133 381 370 868 
Rental income9,846 11,100 19,731 23,451 
Net gain realized on investment securities
Gain on divestitures19,275 19,275 
Gain (loss) on sale of other2,133 2,325 4,981 (244)
Other income4,218 5,801 11,532 9,047 
Total noninterest income113,453 120,513 158,908 157,995 
Noninterest expense:    
Compensation and benefits43,932 34,260 76,263 68,529 
Refund transfer product expense6,146 7,449 6,207 7,621 
Tax advance product expense2,189 1,698 2,559 2,830 
Card processing7,212 6,696 13,329 12,303 
Occupancy and equipment expense6,748 7,013 13,636 13,668 
Operating lease equipment depreciation7,419 8,421 15,000 16,701 
Legal and consulting6,045 5,909 11,292 10,583 
Intangible amortization2,757 3,402 4,770 6,077 
Impairment expense554 507 1,713 750 
Other expense12,969 16,374 23,777 28,464 
Total noninterest expense95,971 91,729 168,546 167,526 
Income before income tax expense61,042 59,225 93,832 82,154 
Income tax expense1,133 5,617 4,665 6,297 
Net income before noncontrolling interest59,909 53,608 89,167 75,857 
Net income attributable to noncontrolling interest843 1,304 2,064 2,485 
Net income attributable to parent$59,066 $52,304 $87,103 $73,372 
Earnings per common share    
Basic$1.84 $1.45 $2.66 $2.00 
Diluted$1.84 $1.45 $2.65 $2.00 
See Notes to Condensed Consolidated Financial Statements.
3

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31,Six Months Ended March 31,
(Dollars in Thousands)2021202020212020
Net income before noncontrolling interest$59,909 $53,608 $89,167 $75,857 
Other comprehensive income (loss):    
Change in net unrealized (loss) on debt securities(9,923)(2,079)(7,077)(5,492)
Net (gain) realized on investment securities(6)(6)
(9,929)(2,079)(7,083)(5,492)
Unrealized gain (loss) on currency translation126 (680)571 (564)
Deferred income tax effect(2,493)(518)(1,779)(1,371)
Total other comprehensive (loss)(7,310)(2,241)(4,733)(4,685)
Total comprehensive income52,599 51,367 84,434 71,172 
Total comprehensive income attributable to noncontrolling interest843 1,304 2,064 2,485 
Comprehensive income attributable to parent$51,756 $50,063 $82,370 $68,687 
See Notes to Condensed Consolidated Financial Statements.

4

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)Meta Financial Group, Inc. Stockholders' Equity
Three Months Ended March 31, 2021 
 
Common
Stock
 
Additional
Paid-in
Capital
 
 
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss), Net of Tax
 
 
Treasury
Stock
Total Meta Stockholders’
Equity
Noncontrolling InterestTotal Equity
Balance, December 31, 2020$326 $598,669 $198,000 $20,119 $(5,440)$811,674 $1,536 $813,210 
Cash dividends declared on common stock ($0.05 per share)— — (1,595)— — (1,595)— (1,595)
Shares repurchased(7)(30,000)— (215)(30,215)— (30,215)
Stock compensation— 2,546 — — — 2,546 — 2,546 
Total other comprehensive (loss)— — — (7,310)— (7,310)— (7,310)
Net income— — 59,066 — — 59,066 843 59,909 
Net investment by (distribution to) noncontrolling interests— — — — — — (1,287)(1,287)
Balance, March 31, 2021$319 $601,222 $225,471 $12,809 $(5,655)$834,166 $1,092 $835,258 
Balance, December 31, 2019$372 $587,678 $244,005 $3,895 $(3,187)$832,763 $4,305 $837,068 
Cash dividends declared on common stock ($0.05 per share)— — (1,783)— — (1,783)— (1,783)
Issuance of common shares due to exercise of stock options— 87 — — — 87 — 87 
Shares repurchased(26)26 (82,499)— (210)(82,709)— (82,709)
Stock compensation— 2,891 — — — 2,891 — 2,891 
Total other comprehensive (loss)— — — (2,241)— (2,241)— (2,241)
Net income— — 52,304 — — 52,304 1,304 53,608 
Net investment by (distribution to) noncontrolling interests— — — — — — (1,847)(1,847)
Balance, March 31, 2020$346 $590,682 $212,027 $1,654 $(3,397)$801,312 $3,762 $805,074 

5

(Dollars in Thousands, Except Share and Per Share Data)Meta Financial Group, Inc. Stockholders' Equity
Six Months Ended March 31, 2021 
 
Common
Stock
 
Additional
Paid-in
Capital
 
 
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Treasury
Stock
Total Meta
Stockholders’
Equity
Noncontrolling InterestTotal Equity
Balance, September 30, 2020$344 $594,569 $234,927 $17,542 $(3,677)$843,705 $3,603 $847,308 
Adoption of Accounting Standards Update 2016-13, net of income taxes— — (8,351)— — (8,351)(2,452)(10,803)
Cash dividends declared on common stock ($0.10 per share)— — (3,209)— — (3,209)— (3,209)
Issuance of common shares due to ESOP3,034 — — — 3,036 — 3,036 
Shares repurchased(27)27 (84,999)— (1,978)(86,977)— (86,977)
Stock compensation— 3,592 — — — 3,592 — 3,592 
Total other comprehensive (loss)— — — (4,733)— (4,733)— (4,733)
Net income— — 87,103 — — 87,103 2,064 89,167 
Net investment by (distribution to) noncontrolling interests— — — — — — (2,123)(2,123)
Balance, March 31, 2021$319 $601,222 $225,471 $12,809 $(5,655)$834,166 $1,092 $835,258 
Six Months Ended March 31, 2020
Balance, September 30, 2019$378 $580,826 $252,813 $6,339 $(445)$839,911 $4,047 $843,958 
Cash dividends declared on common stock ($0.10 per share)— — (3,653)— — (3,653)— (3,653)
Issuance of common shares due to exercise of stock options— 205 — — — 205 — 205 
Issuance of common shares due to restricted stock— — — — — 
Issuance of common shares due to ESOP3,219 — — — 3,220 — 3,220 
Shares repurchased(35)35 (110,505)— (2,952)(113,457)— (113,457)
Stock compensation— 6,397 — — — 6,397 — 6,397 
Total other comprehensive (loss)— — — (4,685)— (4,685)— (4,685)
Net income— — 73,372 — — 73,372 2,485 75,857 
Net investment by (distribution to) noncontrolling interests— — — — — — (2,770)(2,770)
Balance, March 31, 2020$346 $590,682 $212,027 $1,654 $(3,397)$801,312 $3,762 $805,074 
See Notes to Condensed Consolidated Financial Statements.

6


META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31,
(Dollars in Thousands)20212020
Cash flows from operating activities:  
Net income before noncontrolling interest$89,167 $75,857 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net28,414 33,713 
Stock compensation3,592 6,397 
Provision (recovery):
Credit losses36,379 40,703 
Deferred taxes(5,933)(633)
Loans held for sale:
Originations(361,722)(32,234)
Proceeds from sales575,931 160,290 
Net change5,500 17,860 
Fair value adjustment of foreclosed real estate466 104 
Net realized (gain) loss:
Other assets361 
Divestitures(19,275)
Foreclosed real estate and repossessed assets(4)5,039 
Securities available for sale, net(6)
Loans held for sale(4,610)(3,265)
Leases receivable and equipment(360)(1,893)
Net change:
Other assets(28,635)(4,588)
Deposits held for sale1,535 
Accrued interest payable(1,244)(5,807)
Accrued expenses and other liabilities51,018 (10,470)
Accrued interest receivable(801)2,325 
Change in bank-owned life insurance value(1,227)(1,254)
Impairment on assets held for sale242 
Net cash provided by operating activities385,925 265,007 
Cash flows from investing activities:  
Securities available for sale:
Purchases(411,458)(40,686)
Proceeds from sales50,468 
Proceeds from maturities and principal repayments137,635 106,049 
Securities held to maturity:
Proceeds from maturities and principal repayments19,536 18,897 
Loans and leases:
Purchases(99,083)(117,677)
Proceeds from sales12,005 3,099 
Net change(353,781)(130,037)
Proceeds from sales of foreclosed real estate and repossessed assets8,021 23,085 
Federal Reserve Bank and Federal Home Loan Bank stock:
Purchases(1,295)(421,068)
Redemption422,040 
Rental equipment:
Purchases(26,212)(22,675)
Proceeds from sales7,830 10,508 
Net change3,131 
Premises, furniture, and equipment:
Purchases(4,254)(4,817)
Proceeds from divestitures3,498 
Net cash (used in) investing activities(660,588)(146,653)
Cash flows from financing activities:  
Net change:
Checking, savings, and money market deposits3,915,717 746,382 
Time certificates of deposit(7,609)(83,793)
Wholesale deposits(244,895)(748,258)
7

FHLB and other borrowings100,000 
Federal funds(25,000)
Securities sold under agreements to repurchase(4,019)
Distribution to noncontrolling interests(2,123)(2,770)
Proceeds from other liabilities1,633 
Principal payments:
Other liabilities(2,957)(4,372)
Capital lease obligations(16)(1,722)
Cash dividends paid(3,209)(3,653)
Issuance of common stock due to ESOP3,036 3,220 
Issuance of common stock due to restricted stock
Proceeds from exercise of stock options and issuance of common stock205 
Shares repurchased(86,977)(113,457)
Net cash provided by (used in) financing activities3,570,967 (135,602)
Effect of exchange rate changes on cash571 (564)
Net change in cash and cash equivalents3,296,875 (17,812)
Cash and cash equivalents at beginning of fiscal year427,367 126,545 
Cash and cash equivalents at end of fiscal period$3,724,242 $108,733 

Six Months Ended March 31,
 (Dollars in Thousands)20212020
Supplemental disclosure of cash flow information  
Cash paid during the period for:  
Interest$3,063 $17,473 
Income taxes3,176 5,148 
Franchise taxes100 131 
Other taxes591 415 
Supplemental schedule of non-cash investing activities  
Transfers
Loans and leases to foreclosed real estate and repossessed assets5,983 
Loans and leases to rental equipment2,378 430 
Rental equipment to loan and leases62 605 
Loans and leases to held for sale99,922 277,016 
Other assets to held for sale7,858 
Deposits to held for sale288,975 
Recognition of operating lease ROU assets, net of remeasurements12,681 27,019 
See Notes to Condensed Consolidated Financial Statements.

























8

NOTE 1. BASIS OF PRESENTATION

The interim unaudited Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2020 included in Meta Financial Group, Inc.’s (“Meta” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 30, 2020. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the three and six months ended March 31, 2021 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2021.

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

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

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of September 30, 2020 remain substantially unchanged with the exception of the accounting policies for allowance for credit losses and securities impairment as a result of adopting ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related ASUs, as described below.

Allowance for Credit Losses ("ACL"). The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.

Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.

The impairment of all other loans and leases is evaluated collectively by various characteristics. The collective evaluation of expected losses in all commercial finance portfolios is based on a cohort loss rate and adjustments for forward-looking information, including industry and macroeconomic forecasts. The cohort loss rate is a life of loan loss rate that immediately reverts to historical loss information for the remaining maturity of the financial asset. Management has elected to use a twelve-month reasonable and supportable forecast for forward-looking information. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts and measurement date credit characteristics such as product type, delinquency, and industry. The unfunded credit commitments depend on these same factors, as well as estimates of lines of credit usage. The various quantitative and qualitative factors used in the methodologies are reviewed quarterly.

The collective evaluation of expected credit losses for certain consumer lending portfolios utilize different methodologies when estimating expected credit losses. The Company’s student loan portfolio utilizes a roll-rate historical loss rate and adjustments for forward-looking information, including macroeconomic conditions. Management has elected to use a twelve-month reasonable and supportable forecast with an immediate reversion to historical loss rates. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts, and measurement date credit characteristics including delinquency.

9

Loans and leases are charged off to the extent they are deemed uncollectible. Net charge-offs are included in historical data utilized for calculating the ACL. For commercial loans, the Company generally fully charges off or charges down to net realizable value (fair value of collateral, less estimated costs to sell) for loans secured by collateral when management judges the loan to be uncollectible, repayment is deemed to be protracted beyond a reasonable timeframe, the loan has been classified as a loss by either the Company’s internal loan review process or its banking regulatory agencies, the Company has filed bankruptcy and the loss becomes evident owing to lack of assets, or the loans meets a defined number of days past due unless the loan is both well-secured and is in the process of collection. For consumer loans, the Company fully charges off or charges down to net realizable value when deemed uncollectible due to bankruptcy or other factors or meets a defined number of days past due.

The amount of ACL depends significantly on management’s estimates or key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status, the amounts and timing of future cash flows expected to be received, forecasts of future economic conditions and reversion periods. Such estimates, appraisals, evaluations, cash flows and forecasts may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees, properties or economic conditions. These estimates are reviewed quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known.

Accrued interest receivable is presented separately on the Condensed Consolidated Statements of Financial Condition, and an ACL is not recorded for these balances. Generally, when a loan or lease is placed on nonaccrual status, typically when the collection of interest or principal is 90 days or more past due, uncollected interest accrued in prior years is charged off against the ACL and interest accrued in the current year is reversed against interest income.

Management maintains a framework of controls over the estimation process for the ACL, including review of collective reserve methodologies for compliance with GAAP. Management has a quarterly process to review the appropriateness of historical observation periods and loss assumptions and risk ratings assigned to loans and leases, if applicable. Management reviews its qualitative framework and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends. Management also maintains controls over information systems, models and spreadsheets used in the quantitative components of the reserve estimate. This includes the quality and accuracy of historical data used to derive loss rates, the inputs to industry and macroeconomic forecasts and the reversion periods utilized. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance. See Note 6. Loans and Leases, Net for further information.

Securities Impairment. The Company evaluates investment securities held-to-maturity for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Condensed Consolidated Statements of Operations. The Company has concluded that its portfolio as of March 31, 2021 has a zero risk of credit loss due to the U.S. Government financial guarantees underlying the securities within the held-to-maturity portfolio and as a result has not recorded an allowance for credit loss.

The Company evaluates investment securities available-for-sale for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Condensed Consolidated Statements of Operations. See Note 5. Securities for further information.
Adopted ASUs
Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a current expected credit loss (“CECL”) methodology to determine the allowance for credit losses for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. The Company adopted CECL using the modified retrospective approach with a cumulative effect adjustment to Retained Earnings recorded on October 1, 2020.


10

Our adoption resulted in an ACL as of October 1, 2020 that is larger than the allowance for loan and lease losses (“ALLL”) that would have been recorded under legacy guidance on the same date by $12.8 million in total for all portfolios. A portion of this increase is a result of new requirements to record ACL on acquired loans and leases, regardless of any credit mark recorded. Under legacy guidance, credit marks were included in the determination of fair value adjustments reflected as a discount to the carrying value of the loans and leases and an ALLL was not recorded on acquired loans and leases until evidence of credit deterioration existed post acquisition. The remaining credit and interest mark will continue to accrete over the life of the loan or lease but will no longer be considered when estimating the ACL for acquired loans and leases under CECL. The adoption of CECL also resulted in an increase in the liability of unfunded commitments of $0.8 million. For other assets in scope of the standard such as held-to-maturity debt securities and trade and other receivables, the impact from this ASU was inconsequential. The cumulative tax effected adjustment to record ACL and to increase the unfunded commitments liability resulted in a reduction to retained earnings of $8.4 million along with $2.5 million attributable to noncontrolling interests. Post adoption, as loans and leases are added to the portfolio, the Company expects higher levels of ACL determined by CECL assumptions, resulting in accelerated recognition of provision for credit losses, as compared to historical results. In response to the COVID-19 pandemic, regulatory agencies have published a final rule that provides the option to delay the cumulative effect of the day 1 impact to CECL adoption on regulatory capital for two years, followed by a three-year phase in period. Management has elected this five-year transition period consistent with the final rule. Additional and modified disclosure requirements under CECL are included in Note 5. Securities and Note 6. Loans and Leases, Net.

The Company also adopted the following ASUs on October 1, 2020, none of which had a material impact on the Company’s Condensed Consolidated Financial Statements:

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.
ASU 2018-17, Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities.

ASUs to be Adopted
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU are intended to simplify the accounting for income taxes by removing certain exceptions to the general rules found in Topic 740, Income Taxes. The majority of the amendments are to be applied on a prospective basis. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying Interactions between Topics 321, 323 and 815. This ASU clarifies the interactions between Topic 321, Topic 323 and Topic 815, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions to applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform if certain criteria are met. The amendments include a one-time sale or transfer election of held-to-maturity debt securities impacted by reference rate reform. The amendments in this ASU are effective upon issuance through December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. This ASU clarifies that an entity should amortize any premium, if applicable, to the next call date, which is the first date when a call option at a specified price becomes exercisable. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

11

ASU 2020-10, Codification Improvements. This ASU provides clarification, corrects unintended application of guidance, and makes minor improvements to various Topics that are not expected to have a significant impact on the Company’s current accounting policies and practices. Amendments within this ASU are effective for fiscal years beginning after December 15, 2020.

NOTE 3. SIGNIFICANT EVENTS

COVID-19 Pandemic

The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020. Since the onset of this pandemic, macroeconomic conditions and markets have significantly deteriorated. In response to the impacts of COVID-19, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the CARES Act, the U.S. federal government enacted the Consolidated Appropriations Act of 2021 ("CAA") on December 27, 2020 and the American Rescue Plan Act of 2021 ("ARP Act") on March 11, 2021, which provide additional COVID-19 relief to American families and business.

The Company is participating in the Paycheck Protection Program ("PPP"), which is being administered by the Small Business Administration ("SBA"). It is the Company's understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and that a portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. See Note 6. Loans and Leases, Net for further information related to this program.

In response to the COVID-19 pandemic impact on customers, the Company is engaging in more frequent communication with borrowers to better understand their situation and challenges and has been offering credit-worthy borrowers experiencing temporary hardship certain loan and lease modifications ("COVID modifications"), such as payment deferrals, as a result of interagency guidance issued on March 22, 2020 encouraging companies to work with customers impacted by COVID-19. The Company elected to treat COVID modifications on leases as part of the enforceable rights and obligations of the parties under the existing lease contract, resulting in these payment deferrals being treated as variable lease payments under the existing lease versus lease modifications. Additionally, for COVID modifications on loans, the Company adjusted its effective interest rate to reflect the payment deferral modification and continued accruing interest during this period. Short-term modifications made on a good faith basis in response to COVID-19 borrowers whose payments were current prior to any relief, are not to be considered troubled debt restructurings, and will not be considered delinquent so long as they meet their revised obligations under the modification agreement.

12

The table below presents the outstanding balances of active COVID-19 related modifications.

As of the Period Ended
(Dollars in Thousands)March 31, 2021December 31, 2020September 30, 2020
National Lending
Term lending$5,460 $18,321 $26,559 
Asset based lending1,124 7,924 
Factoring18,434 
Lease financing379 1,637 5,896 
Insurance premium finance230 
SBA/USDA7,724 
Other commercial finance69 
Commercial finance5,839 21,082 66,836 
Consumer credit products301 1,210 1,574 
Other consumer finance1,627 2,682 4,223 
Consumer finance1,928 3,892 5,797 
Total National Lending7,767 24,974 72,633 
Community Banking
Commercial real estate and operating58,707 60,319 120,695 
Total Community Banking58,707 60,319 120,695 
Total loans and leases66,474 85,293 193,328 
Total COVID-19 related modifications$66,474 $85,293 $193,328 

NOTE 4. DIVESTITURES

During the fiscal year ended September 30, 2020, the Company sold the Bank's Community Bank division, a component of the Company's Corporate segment, to Central Bank, a state-chartered bank headquartered in Storm Lake, Iowa. The sale included $290.5 million of deposits; $268.6 million of loans; $4.9 million of premises, furniture, and equipment; and $1.3 million of other assets and closed February 29, 2020 (the "Closing Date"). The sale resulted in a gain of $19.3 million before tax that was recognized within noninterest income on the Company's Condensed Consolidated Statements of Operations.

The Company entered a servicing agreement with Central Bank for the retained Community Bank loan portfolio that became effective on the Closing Date. The Company recognized $1.6 million and $0.3 million in servicing fee expense during the six months ended March 31, 2021 and 2020, respectively, and $3.5 million for the fiscal year ended September 30, 2020.

Since the Closing Date, the Company has entered into subsequent loan portfolio sale agreements with Central Bank. The Company sold additional loans from the retained Community Bank portfolio in the amount of $103.2 million and NaN in the three months ended March 31, 2021 and 2020, respectively, and $233.0 million and NaN for the six months ended March 31, 2021 and 2020, respectively. The sales did not result in any significant gains or losses to the Condensed Consolidated Statements of Operations.

13

NOTE 5. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale ("AFS") and held to maturity ("HTM") debt securities are presented below.

Securities Available For Sale
(Dollars in Thousands)Amortized CostGross Unrealized GainsGross Unrealized (Losses)Fair
Value
At March 31, 2021
Debt securities AFS    
SBA securities$166,348 $3,846 $(188)$170,006 
Obligations of states and political subdivisions2,807 10 (1)2,816 
Non-bank qualified obligations of states and political subdivisions288,119 8,285 (682)295,722 
Asset-backed securities453,686 2,726 (3,009)453,403 
Mortgage-backed securities553,184 11,613 (5,964)558,833 
Total debt securities AFS$1,464,144 $26,480 $(9,844)$1,480,780 
At September 30, 2020
Debt securities AFS    
SBA securities$159,722 $5,391 $(158)$164,955 
Obligations of states and political subdivisions825 16 841 
Non-bank qualified obligations of states and political subdivisions314,819 8,978 (23)323,774 
Asset-backed securities329,139 2,015 (6,229)324,925 
Mortgage-backed securities439,879 14,567 (839)453,607 
Total debt securities AFS$1,244,384 $30,967 $(7,249)$1,268,102 

Securities Held To Maturity
(Dollars in Thousands)Amortized CostGross Unrealized GainsGross Unrealized (Losses)Fair
Value
At March 31, 2021
Debt securities HTM    
Non-bank qualified obligations of states and political subdivisions$67,709 $1,083 $$68,792 
Mortgage-backed securities4,403 99 4,502 
Total debt securities HTM$72,112 $1,182 $$73,294 
At September 30, 2020
Debt securities HTM    
Non-bank qualified obligations of states and political subdivisions$87,183 $1,040 $(29)$88,194 
Mortgage-backed securities5,427 124 5,551 
Total debt securities HTM$92,610 $1,164 $(29)$93,745 

14

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, were as follows:

LESS THAN 12 MONTHSOVER 12 MONTHSTOTAL
(Dollars in Thousands)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)
At March 31, 2021
Debt securities AFS
SBA securities$25,310 $(24)$31,825 $(164)$57,135 $(188)
Obligations of state and political subdivisions1,980 (1)1,980 (1)
Non-bank qualified obligations of states and political subdivisions53,328 (682)53,328 (682)
Asset-backed securities75,473 (782)189,365 (2,227)264,838 (3,009)
Mortgage-backed securities291,358 (5,088)35,484 (876)326,842 (5,964)
Total debt securities AFS$447,449 $(6,577)$256,674 $(3,267)$704,123 $(9,844)

LESS THAN 12 MONTHSOVER 12 MONTHSTOTAL
(Dollars in Thousands)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)
At September 30, 2020
Debt securities AFS
SBA securities$32,257 $(102)$9,875 $(56)$42,132 $(158)
Non-bank qualified obligations of states and political subdivisions6,265 (6)3,103 (17)9,368 (23)
Asset-backed securities106,474 (1,089)178,686 (5,140)285,160 (6,229)
Mortgage-backed securities138,338 (839)138,338 (839)
Total debt securities AFS$283,334 $(2,036)$191,664 $(5,213)$474,998 $(7,249)

There were no debt securities HTM with a continuous loss position at March 31, 2021.

LESS THAN 12 MONTHSOVER 12 MONTHSTOTAL
(Dollars in Thousands)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)Fair
Value
Gross Unrealized (Losses)
At September 30, 2020
Debt securities HTM
Non-bank qualified obligations of states and political subdivisions$7,397 $(9)$3,637 $(20)$11,034 $(29)
Total debt securities HTM$7,397 $(9)$3,637 $(20)$11,034 $(29)

The adoption of CECL was inconsequential to debt securities AFS. At March 31, 2021, there were no ACL for debt securities AFS. At March 31, 2021, there were 49 securities AFS in an unrealized loss position. Management assessed each investment security with unrealized losses for credit impairment and determined substantially all unrealized losses on these securities were due to credit spreads and interest rates versus credit impairment. As part of that assessment, management evaluated and concluded that it is more-likely-than-not that the Company will not be required and does not intend to sell any of the securities prior to recovery of the amortized cost.
15

The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features that allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities ("MBS") because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, MBS are not included in the maturity categories in the following maturity summary. The expected maturities of certain SBA securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.

At March 31, 2021At September 30, 2020
(Dollars in Thousands)Amortized CostFair
Value
Amortized CostFair
Value
Securities AFS at Fair Value
Due in one year or less$245 $247 $1,385 $1,398 
Due after one year through five years17,621 18,199 20,805 21,769 
Due after five years through ten years51,152 52,585 32,441 34,025 
Due after ten years841,942 850,916 749,874 757,303 
910,960 921,947 804,505 814,495 
Mortgage-backed securities553,184 558,833 439,879 453,607 
Total securities AFS, at fair value$1,464,144 $1,480,780 $1,244,384 $1,268,102 

At March 31, 2021At September 30, 2020
(Dollars in Thousands)Amortized CostFair
Value
Amortized CostFair
Value
Securities HTM at Fair Value
Due after ten years$67,709 $68,792 $87,183 $88,194 
67,709 68,792 87,183 88,194 
Mortgage-backed securities4,403 4,502 5,427 5,551 
Total securities HTM, at cost$72,112 $73,294 $92,610 $93,745 

Other investments, at cost, include equity securities without a readily determinable fair value, which are included in other assets on the Condensed Consolidated Statements of Financial Condition, and shares of stock in the Federal Reserve Bank (the "FRB") of Minneapolis and the FHLB of Des Moines.

Equity Securities
Equity securities without a readily determinable fair value totaled $13.7 million at March 31, 2021 and $11.0 million at September 30, 2020.

FRB Stock
The Bank is required by federal law to subscribe to capital stock (divided into shares of $100 each) as a member of the FRB of Minneapolis with an amount equal to six per centum of the paid-up capital stock and surplus. One-half of the subscription is paid at time of application, and one-half is subject to call of the Board of Governors of the Federal Reserve System. FRB of Minneapolis stock held by the Bank totaled $19.7 million at March 31, 2021 and September 30, 2020. These equity securities are 'restricted' in that they can only be owned by member banks.

FHLB Stock
The Company's borrowings from the FHLB are secured by a blanket collateral agreement with respect to a percentage of unencumbered loans and the pledge of specific investment securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.

The investments in the FHLB stock are required investments related to the Company's membership in and current borrowings from the FHLB of Des Moines. The investments in the FHLB of Des Moines could be adversely impacted by the financial operations of the FHLB and actions of their regulator, the Federal Housing Finance Agency.

The FHLB stock is carried at cost since it is generally redeemable at par value. The carrying value of the stock held at the FHLB was $8.8 million and $7.5 million at March 31, 2021 and September 30, 2020, respectively.

16

These equity securities are ‘restricted’ in that they can only be sold back to the respective institution from which they were acquired or another member institution at par. Therefore, FRB and FHLB stocks are less liquid than other marketable equity securities, and the fair value approximates cost. The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value.

Equity Security Impairment
For investments held at cost, impairment is evaluated on at least an annual basis on the recoverability of the par value. All other equity investments, including those under the equity method, are reviewed for other-than-temporary impairment on at least a quarterly basis. The Company recognized $1.5 million in impairment recognized for such investments for the six months ended March 31, 2021.

NOTE 6. LOANS AND LEASES, NET

Loans and leases consist of the following:
(Dollars in Thousands)March 31, 2021September 30, 2020
National Lending
Term lending$891,414 $805,323 
Asset based lending248,735 182,419 
Factoring277,612 281,173 
Lease financing308,169 281,084 
Insurance premium finance344,841 337,940 
SBA/USDA331,917 318,387 
Other commercial finance103,234 101,658 
Commercial finance2,505,922 2,307,984 
Consumer credit products104,842 89,809 
Other consumer finance130,822 134,342 
Consumer finance235,664 224,151 
Tax services225,921 3,066 
Warehouse finance332,456 293,375 
Total National Lending3,299,963 2,828,576 
Community Banking
Commercial real estate and operating335,587 457,371 
Consumer one-to-four family real estate and other4,567 16,486 
Agricultural real estate and operating7,911 11,707 
Total Community Banking348,065 485,564 
Total loans and leases3,648,028 3,314,140 
Net deferred loan origination costs (fees)9,503 8,625 
Total gross loans and leases3,657,531 3,322,765 
Allowance for credit losses(98,892)(56,188)
Total loans and leases, net$3,558,639 $3,266,577 

During the six months ended March 31, 2021, the Company transferred $99.9 million of Community Banking loans to held for sale. During the six months ended March 31, 2020, the Company transferred $277.0 million of Community Banking loans to held for sale.

During the six months ended March 31, 2021 and 2020, the Company originated $361.7 million of other consumer finance, SBA/USDA, and consumer credit product loans as held for sale and $32.2 million of SBA/USDA and consumer credit product loans as held for sale, respectively.

The Company sold held for sale loans resulting in proceeds of $476.0 million and gains on sale of $4.6 million during the six months ended March 31, 2021. The Company sold held for sale loans resulting in proceeds of $432.0 million and gains on sale of $6.2 million during the six months ended March 31, 2020.
17



Loans purchased and sold by portfolio segment, including participation interests, for the three and six months ended were as follows:
Three Months Ended March 31,Six Months Ended March 31,
(Dollars in Thousands)2021202020212020
Loans Purchased
Loans held for investment:
Total National Lending$33,605 $89,424 $96,236 $103,888 
Total Community Banking548 9,440 2,847 13,789 
Total purchases$34,153 $98,864 $99,083 $117,677 
Loans Sold
Loans held for sale:
Total National Lending$24,382 $17,255 $346,246 $160,290 
Total Community Banking271,681 129,788 271,681 
Loans held for investment:
Total Community Banking3,099 
Total sales$24,382 $288,936 $476,034 $435,070 

Leasing Portfolio. The net investment in direct financing and sales-type leases was comprised of the following:
(Dollars in Thousands)March 31, 2021September 30, 2020
Carrying amount$327,238 $299,487 
Unguaranteed residual assets17,835 17,203 
Unamortized initial direct costs2,247 2,078 
Unearned income(36,904)(35,606)
Total net investment in direct financing and sales-type leases$310,416 $283,162 

The carrying amount of direct financing and sales-type leases subject to residual value guarantees was $8.1 million at March 31, 2021.

The components of total lease income were as follows:
Three Months Ended March 31,Six Months Ended March 31,
(Dollars in Thousands)2021202020212020
Interest income - loans and leases
Interest income on net investments in direct financing and sales-type leases$6,116 $4,375 $11,435 $8,462 
Leasing and equipment finance noninterest income
Lease income from operating lease payments9,735 11,263 19,776 22,466 
Profit (loss) recorded on commencement date on sales-type leases59 16 130 487 
Other(1)
1,687 1,831 1,756 2,581 
Total leasing and equipment finance noninterest income11,481 13,110 21,662 25,534 
Total lease income$17,597 $17,485 $33,097 $33,996 
(1) Other leasing and equipment finance noninterest income consists of gains (losses) on sales of leased equipment, fees and service charges on leases and gains (losses) on sales of leases.

18

Undiscounted future minimum lease payments receivable for direct financing and sales-type leases and a reconciliation to the carrying amount recorded were as follows:

(Dollars in Thousands)March 31, 2021
Remaining in 2021$63,369 
2022108,413 
202379,701 
202447,563 
202520,468 
Thereafter7,724 
Equipment under leases not yet commenced
Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases327,238 
Third-party residual value guarantees
Total carrying amount of direct financing and sales-type lease$327,238 

The Company did not record any contingent rental income from direct financing and sales-type leases in the six months ended March 31, 2021.

The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020. Since the onset of this pandemic, macroeconomic conditions and markets have significantly deteriorated. Although the ultimate impact of this pandemic on the Company's loan and lease portfolio is difficult to predict, management continues to evaluate the loan and lease portfolio in order to assess the impact on repayment sources and underlying collateral that could result in additional losses and the impact to our customers and businesses as a result of COVID-19 and will refine our estimate as more information becomes available.

Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs on a modified retrospective basis. Financial information at and for the quarter ended March 31, 2021 is reflected as such. The historical information disclosed is in accordance with Topic 310.

19

Activity in the allowance for credit losses and balances of loans and leases by portfolio segment was as follows:
Three Months Ended March 31, 2021
(Dollars in Thousands)Beginning Balance
Provision (Recovery) for Credit Losses(2)
Charge-offsRecoveriesEnding Balance
Allowance for credit losses:
National Lending
Term lending$28,220 $1,396 $(2,477)$176 $27,315 
Asset based lending1,809 539 (599)1,749 
Factoring3,719 (545)36 3,210 
Lease financing6,784 420 (471)130 6,863 
Insurance premium finance1,285 103 (149)87 1,326 
SBA/USDA3,164 136 3,300 
Other commercial finance479 62 541 
Commercial finance45,460 2,111 (3,696)429 44,304 
Consumer credit products835 155 990 
Other consumer finance10,176 266 (419)70 10,093 
Consumer finance11,011 421 (419)70 11,083 
Tax services1,412 27,680 54 29,146 
Warehouse finance319 13 332 
Total National Lending58,202 30,225 (4,115)553 84,865 
Community Banking
Commercial real estate and operating14,121 (22)(134)13,965 
Consumer one-to-four family real estate and other19 (2)17 
Agricultural real estate and operating47 (2)45 
Total Community Banking14,187 (26)(134)14,027 
Total loans and leases72,389 30,199 (4,249)553 98,892 
Unfunded commitments(1)
688 91 779 
Total$73,077 $30,290 $(4,249)$553 $99,671 

(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.
(2) As a result of the adoption of CECL, effective October 1, 2020, the provision for credit losses includes the provision for unfunded commitments that was previously included within other noninterest expense.
20

Six Months Ended March 31, 2021
(Dollars in Thousands)Beginning BalanceImpact of CECL Adoption
Provision (Recovery) for Credit Losses(2)
Charge-offsRecoveriesEnding Balance
Allowance for credit losses:
National Lending
Term lending$15,211 $9,999 $7,422 $(5,789)$472 $27,315 
Asset based lending1,406 164 1,378 (1,199)1,749 
Factoring3,027 987 (1,961)(1)1,158 3,210 
Lease financing7,023 (556)1,532 (1,347)211 6,863 
Insurance premium finance2,129 (965)591 (805)376 1,326 
SBA/USDA940 2,720 (361)3,300 
Other commercial finance182 364 (5)541 
Commercial finance29,918 12,713 8,596 (9,141)2,218 44,304 
Consumer credit products845 145 990 
Other consumer finance2,821 5,998 1,748 (637)163 10,093 
Consumer finance3,666 5,998 1,893 (637)163 11,083 
Tax services28,134 1,010 29,146 
Warehouse finance294 (1)39 332 
Total National Lending33,880 18,710 38,662 (9,778)3,391 84,865 
Community Banking
Commercial real estate and operating21,867 (5,616)(2,141)(145)13,965 
Consumer one-to-four family real estate and other298 (247)(34)17 
Agricultural real estate and operating143 (74)(24)45 
Total Community Banking22,308 (5,937)(2,199)(145)14,027 
Total loans and leases56,188 12,773 36,463 (9,923)3,391 98,892 
Unfunded commitments(1)
32 831 (84)779 
Total$56,220 $13,604 $36,379 $(9,923)$3,391 $99,671 
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.
(2) As a result of the adoption of CECL, effective October 1, 2020, the provision for credit losses includes the provision for unfunded commitments that was previously included within other noninterest expense.
21

Three Months Ended March 31, 2020
(Dollars in Thousands)Beginning BalanceProvision (Recovery) for Loan and Lease LossesCharge-offsRecoveriesEnding Balance
Allowance for loan and lease losses:
National Lending
Term lending$6,750 $5,679 $(877)$95 $11,647 
Asset based lending1,995 803 28 2,826 
Factoring3,548 1,231 (345)10 4,444 
Lease financing1,695 1,043 (152)97 2,683 
Insurance premium finance970 1,935 (789)26 2,142 
SBA/USDA765 910 (117)1,558 
Other commercial finance160 392 552 
Commercial finance15,883 11,993 (2,280)256 25,852 
Consumer credit products1,107 (25)1,082 
Other consumer finance4,889 (1,308)(907)740 3,414 
Consumer finance5,996 (1,333)(907)740 4,496 
Tax services1,650 19,596 74 21,320 
Warehouse finance269 65 334 
Total National Lending23,798 30,321 (3,187)1,070 52,002 
Community Banking
Commercial real estate and operating4,665 5,404 10,069 
Consumer one-to-four family real estate and other1,031 1,319 2,350 
Agricultural real estate and operating682 252 934 
Total Community Banking6,378 6,975 13,353 
Total$30,176 $37,296 $(3,187)$1,070 $65,355 

Six Months Ended March 31, 2020
(Dollars in Thousands)Beginning balanceProvision (recovery) for loan and lease lossesCharge-offsRecoveriesEnding balance
Allowance for loan and lease losses:
National Lending
Term lending$5,533 $9,081 $(3,172)$205 $11,647 
Asset based lending2,437 342 47 2,826 
Factoring3,261 1,489 (735)429 4,444 
Lease financing1,275 1,546 (367)229 2,683 
Insurance premium finance1,024 2,076 (1,074)116 2,142 
SBA/USDA383 1,292 (117)1,558 
Other commercial finance683 (131)552 
Commercial finance14,596 15,695 (5,465)1,026 25,852 
Consumer credit products1,044 38 1,082 
Other consumer finance5,118 (833)(1,640)769 3,414 
Consumer finance6,162 (795)(1,640)769 4,496 
Tax services20,507 813 21,320 
Warehouse finance263 71 334 
Total National Lending21,021 35,478 (7,105)2,608 52,002 
Community Banking
Commercial real estate and operating6,208 3,861 10,069 
Consumer one-to-four family real estate and other1,053 1,297 2,350 
Agricultural real estate and operating867 67 934 
Total Community Banking8,128 5,225 13,353 
Total$29,149 $40,703 $(7,105)$2,608 $65,355 
22


The following table provide additional disclosures previously required by ASC Topic 310 related to the Company's September 30, 2020 balances.

AllowanceLoans and Leases
(Dollars in Thousands)Ending Balance: Individually Evaluated for ImpairmentEnding Balance: Collectively Evaluated for ImpairmentTotalEnding Balance: Individually Evaluated for ImpairmentEnding Balance: Collectively Evaluated for ImpairmentTotal
Recorded Investment
National Lending
Term lending$3,155 $12,056 $15,211��$26,085 $779,238 $805,323 
Asset based lending355 1,051 1,406 5,317 177,102 182,419 
Factoring274 2,753 3,027 5,071 276,102 281,173 
Lease financing1,194 5,829 7,023 4,697 276,387 281,084 
Insurance premium finance2,129 2,129 337,940 337,940 
SBA/USDA940 940 1,436 316,951 318,387 
Other commercial finance182 182 101,658 101,658 
Commercial finance4,978 24,940 29,918 42,606 2,265,378 2,307,984 
Consumer credit products845 845 89,809 89,809 
Other consumer finance2,821 2,821 1,987 132,355 134,342 
Consumer finance3,666 3,666 1,987 222,164 224,151 
Tax services3,066 3,066 
Warehouse finance294 294 293,375 293,375 
Total National Lending4,978 28,902 33,880 44,593 2,783,983 2,828,576 
Community Banking
Commercial real estate and operating141 21,726 21,867 160 457,211 457,371 
Consumer one-to-four family real estate and other298 298 104 16,382 16,486 
Agricultural real estate and operating143 143 6,421 5,286 11,707 
Total Community Banking141 22,167 22,308 6,685 478,879 485,564 
Total$5,119 $51,069 $56,188 $51,278 $3,262,862 $3,314,140 


23

Information on impaired loans and leases, all of which are deemed to be collateral dependent and are evaluated individually for the ACL was as follows:

(Dollars in Thousands)March 31, 2021
National Lending
Term lending$13,794 
Asset based lending373 
Factoring35 
Lease financing2,389 
SBA/USDA600 
Commercial finance17,191 
Consumer credit products2,097 
Consumer finance2,097 
Total National Lending19,288 
Community Banking
Commercial real estate and operating17,896 
Consumer one-to-four family real estate and other170 
Agricultural real estate and operating4,658 
Total Community Banking22,724 
Total$42,012 
24


Information on impaired loans and leases as of September 30, 2020 was as follows:

(Dollars in Thousands)Recorded
Balance
Unpaid Principal
Balance
Specific
Allowance
Loans and leases without a specific valuation allowance
National Lending
Term lending$17,349 $18,823 $— 
Asset based lending3,914 3,914 — 
Factoring3,892 4,967 — 
Lease financing1,797 1,805 — 
SBA/USDA1,436 2,263 — 
Commercial finance28,388 31,772 — 
Other consumer finance1,987 2,104 — 
Consumer finance1,987 2,104 — 
Total National Lending30,375 33,876 — 
Community Banking
Consumer one-to-four family real estate and other104 104 — 
Agricultural real estate and operating6,421 6,421 — 
Total Community Banking6,525 6,525 — 
Total$36,900 $40,401 $— 
Loans and leases with a specific valuation allowance
National Lending
Term lending$8,736 $8,736 $3,155 
Asset based lending1,403 1,403 355 
Factoring1,179 1,191 274 
Lease financing2,900 2,900 1,194 
Commercial finance14,218 14,230 4,978 
Total National Lending14,218 14,230 4,978 
Community Banking
Commercial real estate and operating160 160 141 
Total Community Banking Loans160 160 141 
Total$14,378 $14,390 $5,119 

In response to the ongoing COVID-19 pandemic, the Company allowed modifications, such as payment deferrals and temporary forbearances, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. Accordingly, if all payments were less than 30 days past due prior to the onset of the pandemic effects, the loan or lease will not be reported as past due during the deferral or forbearance period. As of March 31, 2021, $66.5 million of loan and lease balances that were granted deferral payments by the Company were still in their deferment period due to performing borrowers experiencing temporary hardship from COVID-19. These modifications consisted solely of payment deferrals ranging from 30 days to six months. These modifications are in line with applicable regulatory guidelines and, therefore, they are not reported as troubled debt restructurings. Other than the loan modifications that are on nonaccrual status, the Company is accruing and recognizing interest income on these modifications during the payment deferral period. The Company continues to regularly assess the collectability of the income on these active deferral relationships and considers adjustments to the accruing status on an individual case basis.

The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans and leases to an individual, a specific industry, or a geographic location. Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Company’s Tier 1 Capital plus the allowable Allowance for Credit Losses.

25

Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Bank's primary regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.” 

The Company has various portfolios of consumer finance and tax services loans that present unique risks. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The outstanding balances of consumer finance loans and tax services loans were $235.7 million and $225.9 million at March 31, 2021, respectively, and $224.2 million and $3.1 million at September 30, 2020, respectively. The amortized cost basis of loans and leases by asset classification and year of origination was as follows:

Amortized Cost Basis
(Dollars in Thousands)Term Loans and Leases by Origination YearRevolving Loans and LeasesTotal
As of March 31, 202120212020201920182017Prior
Term lending
Pass$200,824 $392,195 $123,457 $67,408 $5,541 $19,373 $$808,798 
Watch1,807 12,959 8,322 682 564 1,564 25,898 
Special Mention6,292 5,694 1,377 42 7,871 21,276 
Substandard4,745 23,344 4,520 142 770 33,521 
Doubtful58 919 601 343 1,921 
Total202,689 417,110 161,418 74,330 6,289 29,578 891,414 
Asset based lending
Pass166,247 166,247 
Watch61,887 61,887 
Special Mention16,854 16,854 
Substandard3,747 3,747 
Total248,735 248,735 
Factoring
Pass233,225 233,225 
Watch20,262 20,262 
Special Mention16,220 16,220 
Substandard7,905 7,905 
Total277,612 277,612 
Lease financing
Pass77,907 133,720 44,897 16,476 7,843 1,008 281,851 
Watch4,750 12,832 325 478 341 438 19,164 
Special Mention125 1,753 183 223 44 2,328 
Substandard304 3,241 887 4,435 
Doubtful118 273 391 
Total82,782 148,727 48,919 18,064 8,231 1,446 308,169 
Insurance premium finance
Pass292,948 50,092 23 343,063 
Watch35 301 336 
Special Mention1,236 107 1,343 
Substandard33 33 
Doubtful66 66 
Total294,219 50,599 23 344,841 
SBA/USDA
Pass97,498 155,760 24,689 22,832 9,093 7,384 317,256 
Watch6,782 643 449 1,379 952 10,205 
Special Mention1,814 69 1,883 
26

Substandard1,203 698 672 2,573 
Total97,498 162,542 25,332 26,298 11,170 9,077 331,917 
Other commercial finance
Pass20,603 9,259 6,305 3,801 60,162 100,130 
Watch642 857 1,327 2,826 
Substandard278 278 
Total642 20,603 9,259 6,583 4,658 61,489 103,234 
Warehouse finance
Pass332,456 332,456 
Total332,456 332,456 
Total National Lending
Pass669,178 752,369 202,325 113,022 26,278 87,926 731,928 2,583,026 
Watch7,233 32,873 9,291 1,608 3,142 4,282 82,149 140,578 
Special Mention1,361 8,153 5,876 3,414 86 7,940 33,074 59,904 
Substandard5,083 26,585 6,888 842 1,442 11,652 52,492 
Doubtful58 1,103 874 343 2,378 
Total677,830 799,581 244,951 125,275 30,348 101,590 858,803 2,838,378 
Commercial real estate and operating
Pass13,109 105,549 80,399 33,003 533 232,593 
Watch926 4,182 52,490 20,496 6,013 84,107 
Special Mention684 684 
Substandard300 700 16,897 306 18,203 
Total14,335 110,431 149,786 53,499 7,536 335,587 
Consumer 1-4 family real estate and other
Pass159 875 374 2,869 4,277 
Substandard110 41 139 290 
Total269 875 415 3,008 4,567 
Agricultural real estate and other
Pass85 108 2,586 2,779 
Substandard3,278 1,263 591 5,132 
Total3,278 85 1,371 3,177 7,911 
Total Community Bank
Pass13,109 105,793 81,382 33,377 5,988 239,649 
Watch926 4,182 52,490 20,496 6,013 84,107 
Special Mention684 684 
Substandard3,578 810 18,160 41 1,036 23,625 
Total17,613 110,785 152,032 53,914 13,721 348,065 
Total Loans and Leases
Pass669,178 765,478 308,118 194,404 59,655 93,914 731,928 2,822,675 
Watch7,233 33,799 13,473 54,098 23,638 10,295 82,149 224,685 
Special Mention1,361 8,153 5,876 3,414 86 8,624 33,074 60,588 
Substandard8,661 27,395 25,048 883 2,478 11,652 76,117 
Doubtful58 1,103 874 343 2,378 
Total$677,830 $817,194 $355,736 $277,307 $84,262 $115,311 $858,803 $3,186,443 
27


The recorded investment of loans and leases by asset classification was as follows:

Asset ClassificationPassWatchSpecial MentionSubstandardDoubtfulTotal
As of September 30, 2020(Dollars in Thousands)
National Lending
Term lending$725,101 $29,637 $24,501 $21,249 $4,835 $805,323 
Asset based lending102,013 62,512 12,577 5,317 182,419 
Factoring217,245 45,200 13,657 5,071 281,173 
Lease financing264,700 8,879 2,808 4,148 549 281,084 
Insurance premium finance336,364 284 222 701 369 337,940 
SBA/USDA308,549 8,328 74 1,436 318,387 
Other commercial finance100,727 931 101,658 
Commercial finance2,054,699 155,771 53,839 37,922 5,753 2,307,984 
Warehouse finance293,375 293,375 
Total National Lending2,348,074 155,771 53,839 37,922 5,753 2,601,359 
Community Banking
Commercial real estate and operating336,236 98,295 4,049 18,211 580 457,371 
Consumer one-to-four family real estate and other15,648 41 609 188 16,486 
Agricultural real estate and operating1,526 4,930 5,251 11,707 
Total Community Banking353,410 98,336 9,588 23,650 580 485,564 
Total loans and leases$2,701,484 $254,107 $63,427 $61,572 $6,333 $3,086,923 

28

Past due loans and leases were as follows:

Accruing and Nonaccruing Loans and LeasesNonperforming Loans and Leases
(Dollars in Thousands)30-59 Days
Past Due
60-89 Days
Past Due
>
89 Days Past Due
Total Past
Due
CurrentTotal Loans and Leases
Receivable
> 89 Days Past Due and AccruingNon-accrual balanceTotal
As of March 31, 2021
Loans held for sale$$$$$67,635 $67,635 $$$
National Lending
Term lending22,074 7,628 2,592 32,294 859,120 891,414 353 14,665 15,018 
Asset based lending13 13 248,722 248,735 382 382 
Factoring277,612 277,612 35 35 
Lease financing10,216 662 3,882 14,760 293,409 308,169 2,043 2,623 4,666 
Insurance premium finance1,290 440 2,414 4,144 340,697 344,841 2,414 2,414 
SBA/USDA600 600 331,317 331,917 600 600 
Other commercial finance1,082 1,082 102,152 103,234 
Commercial finance34,675 8,730 9,488 52,893 2,453,029 2,505,922 4,810 18,305 23,115 
Consumer credit products1,737 3,898 2,019 7,654 97,188 104,842 243 243 
Other consumer finance296 264 275 835 129,987 130,822 274 274 
Consumer finance2,033 4,162 2,294 8,489 227,175 235,664 517 517 
Tax services507 — 507 225,414 225,921 
Warehouse finance332,456 332,456 
Total National Lending37,215 12,892 11,782 61,889 3,238,074 3,299,963 5,327 18,305 23,632 
Community Banking
Commercial real estate and operating12 12 335,575 335,587 17,896 17,896 
Consumer one-to-four family real estate and other49 49 4,518 4,567 159 159 
Agricultural real estate and operating1,769 1,769 6,142 7,911 1,769 1,769 
Total Community Banking12 1,818 1,830 346,235 348,065 19,824 19,824 
Total loans and leases held for investment37,227 12,892 13,600 63,719 3,584,309 3,648,028 5,327 38,129 43,456 
Total loans and leases$37,227 $12,892 $13,600 $63,719 $3,651,944 $3,715,663 $5,327 $38,129 $43,456 

29

Accruing and Nonaccruing Loans and LeasesNonperforming Loans and Leases
(Dollars in Thousands)30-59 Days
Past Due
60-89 Days
Past Due
>
89 Days Past Due
Total Past
Due
CurrentTotal Loans and Leases
Receivable
> 89 Days Past Due and AccruingNon-accrual balanceTotal
As of September 30, 2020
Loans held for sale$$$$$183,577 $183,577 $$$
National Lending
Term lending11,900 3,851 6,390 22,141 783,182 805,323 266 16,274 16,540 
Asset based lending17 17 182,402 182,419 
Factoring281,173 281,173 1,096 1,096 
Lease financing194 9,746 6,882 16,822 264,262 281,084 4,344 3,583 7,927 
Insurance premium finance1,227 748 2,364 4,339 333,601 337,940 2,364 2,364 
SBA/USDA1,027 1,027 317,360 318,387 427 600 1,027 
Other commercial finance101,658 101,658 
Commercial finance13,338 14,345 16,663 44,346 2,263,638 2,307,984 7,401 21,553 28,954 
Consumer credit products377 358 499 1,233 88,576 89,809 499 499 
Other consumer finance600 536 373 1,509 132,833 134,342 373 373 
Consumer finance977 894 872 2,743 221,408 224,151 872 872 
Tax services1,743 1,743 1,323 3,066 1,743 1,743 
Warehouse finance293,375 293,375 
Total National Lending14,315 15,239 19,278 48,832 2,779,744 2,828,576 10,016 21,553 31,569 
Community Banking
Commercial real estate and operating630 630 456,741 457,371 50 580 630 
Consumer one-to-four family real estate and other905 114 50 1,069 15,417 16,486 50 50 
Agricultural real estate and operating1,769 1,769 9,938 11,707 1,769 1,769 
Total Community Banking905 114 2,449 3,468 482,096 485,564 50 2,399 2,449 
Total loans and leases held for investment15,220 15,353 21,727 52,300 3,261,840 3,314,140 10,066 23,952 34,018 
Total loans and leases$15,220 $15,353 $21,727 $52,300 $3,445,417 $3,497,717 $10,066 $23,952 $34,018 























30

Nonaccrual loans and leases by year of origination were as follows:

Amortized Cost Basis
(Dollars in Thousands)Term Loans and Leases by Origination YearRevolving Loans and LeasesTotalNonaccrual With No ACL
March 31, 202120212020201920182017Prior
National Lending
Term lending$72 $2,746 $8,834 $2,426 $23 $564 $$14,665 $7,942 
Asset based lending382 382 
Factoring35 35 
Lease financing358 1,906 359 2,623 1,118 
SBA/USDA600 600 600 
Commercial finance72 3,104 10,740 2,785 623 564 417 18,305 9,669 
Total National Lending72 3,104 10,740 2,785 623 564 417 18,305 9,669 
Community Banking
Commercial real estate and operating300 700 16,896 17,896 
Consumer one-to-four family real estate and other110 41 159 159 
Agricultural real estate and operating1,263 506 1,769 1,769 
Total Community Banking300 810 18,159 41 514 19,824 1,928 
Total nonaccrual loans and leases$72 $3,404 $11,550 $20,944 $664 $1,078 $417 $38,129 $11,597 

Loans and leases that are 90 days or more delinquent and accruing by year of origination were as follows:
Amortized Cost Basis
(Dollars in Thousands)Term Loans and Leases by Origination YearRevolving Loans and LeasesTotal
March 31, 202120212020201920182017Prior
National Lending
Term lending$$$$220 $112 $21 $$353 
Lease financing1,247 323 139 301 33 2,043 
Insurance premium finance1,313 1,101 2,414 
Commercial finance2,560 1,424 139 521 145 21 4,810 
Other consumer finance274 274 
Consumer finance (1)
274 274 
Total National Lending2,560 1,424 139 521 145 295 5,084 
Total 90 days or more delinquent and accruing$2,560 $1,424 $139 $521 $145 $295 $$5,084 
(1) Consumer credit products are not included in the table as they are evaluated under a separate methodology for allowance for credit loss purposes that considers the overall Program structure. Refer to the Company’s most recent audited financial statements for additional information on these Programs.

Certain loans and leases 90 days or more past due as to interest or principal continue to accrue because they are (1) well-secured and in the process of collection or (2) one-to-four family real estate loans or consumer loans exempt under regulatory rules from being classified as non-accrual until later delinquency, usually 120 days past due.

When analysis of borrower or lessee operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan or lease is evaluated for impairment. Often, this is associated with a delay or shortfall in scheduled payments, as described above.


31

The following table provides the average recorded investment in non-accrual loans and leases:

Average Recorded Investment
(Dollars in Thousands)Three Months Ended March 31, 2021Six Months Ended March 31, 2021
National Lending
Term lending$12,729 $13,802 
Asset based lending572 823 
Factoring44 490 
Lease financing2,990 3,273 
SBA/USDA600 600 
Commercial finance16,935 18,988 
Total National Lending16,935 18,988 
Community Banking
Commercial real estate and operating18,269 12,404 
Consumer one-to-four family real estate and other161 143 
Agricultural real estate and operating1,769 1,769 
Total Community Banking20,199 14,316 
Total loans and leases$37,134 $33,304 

The recognized interest income on the Company's nonaccrual loans and leases for the three and six months ended March 31, 2021 was not significant.

The following table provides the average recorded investment in impaired loans and leases:

Three Months Ended March 31, 2020Six Months Ended March 31, 2020
(Dollars in Thousands)Average Recorded InvestmentRecognized Interest IncomeAverage Recorded InvestmentRecognized Interest Income
National Lending
Term lending$26,454 $46 $22,995 $120 
Asset based lending350 389 
Factoring4,596 4,223 
Lease financing2,154 12 2,920 12 
SBA/USDA3,640 3,714 
Commercial finance37,194 58 34,241 132 
Other consumer finance1,775 39 1,663 73 
Consumer finance1,775 39 1,663 73 
Total National Lending38,970 97 35,904 205 
Community Banking
Commercial real estate and operating682 12 564 25 
Consumer one-to-four family real estate and other82 85 
Agricultural real estate and operating2,674 (186)2,798 (144)
Total Community Banking3,438 (173)3,447 (110)
Total loans and leases$42,408 $(76)$39,351 $95 

The Company’s troubled debt restructurings ("TDRs") typically involve forgiving a portion of interest or principal on existing loans, making loans at a rate materially less than current market rates, or extending the term of the loan. There were $2.1 million of national lending loans that were modified in a TDR during the three months ended March 31, 2021, all of which were modified to extend the term of the loan, and 0 community banking loans. There were $3.7 million of national lending loans and leases that were modified in a TDR during the three months ended March 31, 2020 and 0 community banking loans.

32

During the six months ended March 31, 2021, there were $2.2 million of national lending loans and 0 community bank loans that were modified in a TDR, all of which were modified to extend the term of the loan. There were $4.1 million of national lending loans and leases and $0.6 million of community banking loans that were modified in a TDR during the six months ended March 31, 2020.

During the six months ended March 31, 2021, the Company had $0.1 million of national lending loans and 0 community banking loans that were modified in a TDR within the previous 12 months and for which there was a payment default. During the six months ended March 31, 2020, the Company had $3.2 million of community banking loans and $2.9 million national lending loans that were modified in a TDR within the previous 12 months and for which there was a payment default. TDR net charge-offs and the impact of TDRs on the Company's allowance for credit losses were insignificant during the quarters ended March 31, 2021 and March 31, 2020.

NOTE 7. EARNINGS PER COMMON SHARE ("EPS")

The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the earnings per share calculation under the two-class method. Basic earnings per common share is computed using the two-class method by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated using the more dilutive of the treasury stock method or the two-class method. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company’s stock options, performance share units, and nonvested restricted stock, where applicable. Diluted EPS under the two-class method also considers the allocation of earnings to the participating securities. Antidilutive securities are disregarded in earnings per share calculations. Diluted EPS shown below reflects the two-class method, as diluted EPS under the two-class method was more dilutive than under the treasury stock method.


33

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 March 31,Six Months Ended March 31,
(Dollars in Thousands, Except Share and Per Share Data)2021202020212020
Basic income per common share:
Net income attributable to Meta Financial Group, Inc.$59,066 $52,304 $87,103 $73,372 
Dividends and undistributed earnings allocated to participating securities(1,113)(1,215)(1,683)(1,652)
Basic net earnings available to common stockholders57,953 51,089 85,420 71,720 
Undistributed earnings allocated to nonvested restricted stockholders1,083 1,173 1,620 1,570 
Reallocation of undistributed earnings to nonvested restricted stockholders(1,082)(1,172)(1,619)(1,569)
Diluted net earnings available to common stockholders$57,954 $51,090 $85,421 $71,721 
Total weighted-average basic common shares outstanding31,520,505 35,114,053 32,158,994 35,865,443 
Effect of dilutive securities(1)
Stock options21,497 21,634 
Performance share units14,517 16,490 
Total effect of dilutive securities14,517 21,497 16,490 21,634 
Total weighted-average diluted common shares outstanding31,535,022 35,135,550 32,175,484 35,887,077 
Net earnings per common share:
Basic earnings per common share$1.84 $1.45 $2.66 $2.00 
Diluted earnings per common share(2)
$1.84 $1.45 $2.65 $2.00 
(1) Represents the effect of the assumed exercise of stock options and vesting of performance share units and restricted stock, as applicable, utilizing the treasury stock method.
(2) Excluded from the computation of diluted earnings per share for the three months ended March 31, 2021 and 2020, respectively, were 605,459 and 834,746 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive. Excluded from the computation of diluted earnings per share for the six months ended March 31, 2021 and 2020, respectively, were 633,553 and 826,262 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive.

NOTE 8. RENTAL EQUIPMENT, NET

Rental equipment consists of the following:

(Dollars in Thousands)March 31, 2021September 30, 2020
Computers and IT networking equipment$16,313 $15,926 
Motor vehicles and other56,012 52,913 
Office furniture and equipment73,889 74,197 
Solar panels and equipment128,430 118,808 
Total274,644 261,844 
Accumulated depreciation(65,013)(57,601)
Unamortized initial direct costs1,766 1,721 
Net book value$211,397 $205,964 
34


Undiscounted future minimum lease payments expected to be received for operating leases were as follows:
(Dollars in Thousands)March 31, 2021
Remaining in 2021$17,689 
202230,532 
202326,189 
202418,948 
202513,843 
Thereafter20,269 
Total undiscounted future minimum lease payments receivable for operating leases$127,470 

NOTE 9. FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

The following table provides an analysis of changes in foreclosed real estate and repossessed assets:

Six Months Ended March 31,
(Dollars in Thousands)20212020
Balance, beginning of period$9,957 $29,494 
Additions5,983 
Reductions:
Write-downs466 104 
Sales8,021 23,085 
(Gain) loss on sale(4)5,039 
Total reductions8,483 28,228 
Balance, ending of period$1,483 $7,249 

At March 31, 2021 and September 30, 2020, the Company had established a valuation allowance of $1.0 million and $0.5 million for repossessed assets, respectively. As of March 31, 2021 and September 30, 2020, the Company had 0 loans or leases in the process of foreclosure.

During the fiscal year ended September 30, 2020, the Company sold $28.1 million of other real estate owned ("OREO"), which consisted of assets related to a Community Bank agriculture real estate customer. The sale consisted of 30-plus parcels of land and the Company recognized a $5.0 million loss that was included in the "Gain (loss) on sale of other" line on the Condensed Consolidated Statements of Operations. The Company also recognized $1.1 million in deferred rental income and $0.2 million in OREO expenses related to these foreclosed properties.

NOTE 10. GOODWILL AND INTANGIBLE ASSETS

The Company held a total of $309.5 million of goodwill at March 31, 2021. The recorded goodwill is a result of multiple business combinations that have been consummated since fiscal year 2015, with the most recent being the merger with Crestmark pursuant to the Crestmark Acquisition that closed on August 1, 2018. Goodwill is assessed for impairment at least annually or more often if conditions indicate a possible impairment. The assessment is done at a reporting unit level, which is one level below the operating segments. There have been 0 changes to the carrying amount of goodwill during the six months ended March 31, 2021.
 
35

The changes in the carrying amount of the Company’s intangible assets for the six months ended March 31, 2021 and 2020 were as follows:

(Dollars in Thousands)
Trademark(1)
Non-Compete(2)
Customer Relationships(3)
All Others(4)
Total
Balance as of September 30, 2020$10,901 $422 $24,333 $6,036 $41,692 
Acquisitions during the period
Amortization during the period(544)(191)(3,716)(319)(4,770)
Write-offs during the period(24)(24)
Balance as of March 31, 2021$10,357 $231 $20,617 $5,698 $36,903 
Gross carrying amount$14,624 $2,481 $82,088 $10,123 $109,316 
Accumulated amortization(4,267)(2,250)(51,223)(4,207)(61,947)
Accumulated impairment(10,248)(218)(10,466)
Balance as of March 31, 2021$10,357 $231 $20,617 $5,698 $36,903 
(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 3-5 years. Amortized using the straight line method.
(3) Book amortization period of 10-30 years. Amortized using the accelerated method.
(4) Book amortization period of 3-20 years. Amortized using the straight line method.

(Dollars in Thousands)
Trademark(1)
Non-Compete(2)
Customer Relationships(3)
All Others(4)
Total
Balance as of September 30, 2019$11,959 $827 $33,207 $6,817 $52,810 
Acquisitions during the period33 33 
Amortization during the period(528)(212)(4,997)(340)(6,077)
Balance as of March 31, 2020$11,431 $615 $28,210 $6,510 $46,766 
Gross carrying amount$14,624 $2,480 $82,088 $10,736 $109,928 
Accumulated amortization(3,193)(1,865)(43,630)(3,567)(52,255)
Accumulated impairment(10,248)(659)(10,907)
Balance as of March 31, 2020$11,431 $615 $28,210 $6,510 $46,766 
(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.

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 six months of fiscal 2021 and subsequent fiscal years was as follows:

(Dollars in Thousands)March 31, 2021
Remaining in 2021$3,775 
20226,419 
20235,101 
20244,383 
20253,827 
20263,253 
Thereafter10,145 
Total anticipated intangible amortization$36,903 

The Company tests intangible assets for impairment at least annually or more often if conditions indicate a possible impairment. There were 0 impairments to intangible assets during the six months ended March 31, 2021 and 2020.
36


NOTE 11. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

Operating lease ROU assets, included in other assets, were $36.1 million at March 31, 2021.

Operating lease liabilities, included in accrued expenses and other liabilities, were $38.1 million at March 31, 2021.

Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities were as follows:

(Dollars in Thousands)March 31, 2021
Remaining in 2021$2,219 
20224,596 
20233,999 
20244,152 
20254,027 
Thereafter24,926 
Total undiscounted future minimum lease payments43,919 
Discount(5,817)
Total operating lease liabilities$38,102 

The weighted-average discount rate and remaining lease term for operating leases were as follows:

March 31, 2021
Weighted-average discount rate2.31 %
Weighted-average remaining lease term (years)11.23

The components of total lease costs for operating leases were as follows:
Three Months Ended March 31,Six Months Ended March 31,
(Dollars in Thousands)2021202020212020
Lease expense$991 $869 $1,945 $1,613 
Short-term and variable lease cost69 156 132 334 
ROU asset impairment224 
Sublease income(177)(175)(285)(364)
Total lease cost for operating leases$883 $850 $2,016 $1,583 

NOTE 12. STOCKHOLDERS' EQUITY

Repurchase of Common Stock
The Company's Board of Directors authorized the November 20, 2019 share repurchase program to repurchase up to 7,500,000 shares of the Company's outstanding common stock. This authorization is effective from November 21, 2019 through December 31, 2022. During the six months ended March 31, 2021, and 2020, the Company repurchased 2,683,579 and 3,497,565 shares, respectively, as part of the share repurchase program.
Under the repurchase program, repurchased shares were retired and designated as authorized but unissued shares. The Company accounts for repurchased shares using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings. As of March 31, 2021, the remaining number of shares available for repurchase under this program was 1,550,173 shares of common stock.
For the six months ended March 31, 2021, and 2020, the Company also repurchased 84,121 and 88,784 shares, or $1.9 million and $2.9 million of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
37

NOTE 13. STOCK COMPENSATION

The Company maintains the Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended and restated (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of stock options, nonvested (restricted) shares, and performance share units ("PSUs") to certain officers and directors of the Company. Awards are granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

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

The following tables show the activity of nonvested (restricted) shares and PSUs granted, exercised, or forfeited under the 2002 Omnibus Incentive Plan for the six months ended March 31, 2021. There were 0 options granted, exercised or forfeited under this plan during the six months ended March 31, 2021.

(Dollars in Thousands, Except Per Share Data)Number of SharesWeighted Average Fair Value at Grant
Nonvested shares outstanding, September 30, 2020790,083 $30.03 
Granted189,187 30.78 
Vested(274,096)30.22 
Forfeited or expired(98,399)29.66 
Nonvested shares outstanding, March 31, 2021606,775 $30.24 

(Dollars in Thousands, Except Per Share Data)Number of UnitsWeighted Average Fair Value at Grant
Performance share units outstanding, September 30, 2020$
Granted(1)
60,984 34.03 
Vested
Forfeited or expired
Performance share units outstanding, March 31, 202160,984 $34.03 
(1) The number of PSUs granted reflects the target number of PSUs able to be earned under a given award.

At March 31, 2021, stock-based compensation expense not yet recognized in income totaled $8.9 million, which is expected to be recognized over a weighted average remaining period of 2.10 years.

NOTE 14. INCOME TAXES

The Company recorded an income tax expense of $4.7 million for the six months ended March 31, 2021, resulting in an effective tax rate of 4.97%, compared to an income tax expense of $6.3 million, or an effective tax rate of 7.66%, for the six months ended March 31, 2020. The Company’s effective tax rate was lower than the U.S. statutory rate of 21% primarily because of the anticipated effect of investment tax credits during fiscal year 2019. The Company’s effective tax rate in the future will depend in part on actual investment tax credits earned as part of its financing of solar energy projects.

38

The table below compares the income tax expense components for the periods presented.

Six Months Ended March 31,
(Dollars in Thousands)20212020
Provision at statutory rate$19,271 $16,730 
Tax-exempt income(486)(591)
State income taxes4,135 3,682 
Interim period effective rate adjustment(3,116)(3,321)
Tax credit investments, net - federal(15,464)(9,536)
Research tax credit(323)(1,709)
IRC 162(m) nondeductible compensation487 1,019 
Other, net161 23 
Income tax expense (benefit)$4,665 $6,297 
Effective tax rate4.97 %7.66 %

NOTE 15. COMMITMENTS AND CONTINGENCIES

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

At March 31, 2021 and September 30, 2020, unfunded loan commitments approximated $1.28 billion and $1.22 billion, respectively, excluding undisbursed portions of loans in process. Commitments, which are disbursed subject to certain limitations, extend over various periods of time. Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract.

The Company had 0 commitments to purchase securities at March 31, 2021 or September 30, 2020. The Company had 0 commitments to sell securities at March 31, 2021 or September 30, 2020.

The exposure to credit loss in the event of non-performance by other parties to financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance-sheet instruments.

Since certain commitments to make loans and to fund lines of credit expire without being used, the amount does not necessarily represent future cash commitments. In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Legal Proceedings

The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that, after all of the programs were wound down, there were two accounts with positive balances to which Card Limited is entitled. The Bank’s position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is entitled is $4.0 million. The Court ruled in favor of MetaBank on cross motions for summary judgment and vacated the trial. Card Limited has appealed the decision, but thereafter agreed to settle this claim for a nominal amount. This payment has been made and the case has been dismissed.


39

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

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

NOTE 16. REVENUE FROM CONTRACTS WITH CUSTOMERS

Topic 606 applies to all contracts with customers unless such revenue is specifically addressed under existing guidance. The table below presents the Company’s revenue by operating segment. For additional descriptions of the Company’s operating segments, including additional financial information and the underlying management accounting process, see Note 17. Segment Reporting to the Condensed Consolidated Financial Statements.

(Dollars in Thousands)ConsumerCommercialCorporate Services/OtherConsolidated Company
Three Months Ended March 31,20212020202120202021202020212020
Net interest income(1)
$25,085 $16,162 $42,404 $37,026 $6,361 $14,549 $73,850 $67,737 
Noninterest income:
Refund transfer product fees22,680 28,939 22,680 28,939 
Tax advance product fees(1)
44,562 29,536 44,562 29,536 
Payment card and deposit fees29,875 23,156 29,875 23,156 
Other bank and deposit fees126 268 113 133 381 
Rental income(1)
9,841 11,094 9,846 11,100 
Net gain realized on investment securities(1)
Gain on divestitures(1)
19,275 19,275 
Gain (loss) on sale of other(1)
(259)1,624 2,579 509 2,133 2,325 
Other income(1)
919 1,831 2,349 1,582 950 2,388 4,218 5,801 
Total noninterest income98,041 83,208 13,940 15,523 1,472 21,782 113,453 120,513 
Revenue$123,126 $99,370 $56,344 $52,549 $7,833 $36,331 $187,303 $188,250 
(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.
40

(Dollars in Thousands)ConsumerCommercialCorporate Services/OtherConsolidated Company
Six Months Ended March 31,20212020202120202021202020212020
Net interest income(1)
$47,432 $32,719 $84,252 $76,762 $8,165 $22,907 $139,849 $132,388 
Noninterest income:
Refund transfer product fees23,327 29,131 23,327 29,131 
Tax advance product fees(1)
46,522 31,812 46,522 31,812 
Payment card and deposit fees52,439 44,655 52,439 44,655 
Other bank and deposit fees360 546 10 322 370 868 
Rental income(1)
10 19,721 22,128 1,314 19,731 23,451 
Net gain realized on investment securities(1)
Gain on divestitures(1)
19,275 19,275 
Gain (loss) on sale of other(1)
(19)4,216 4,917 765 (5,142)4,981 (244)
Other income(1)
1,078 2,384 4,809 2,911 5,645 3,752 11,532 9,047 
Total noninterest income123,376 107,972 29,106 30,502 6,426 19,521 158,908 157,995 
Revenue$170,808 $140,691 $113,358 $107,264 $14,591 $42,428 $298,757 $290,383 
(1) These revenues are not within the scope of Topic 606. Additional details are included in other footnotes to the accompanying financial statements. The scope of Topic 606 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including loans, leases, and securities.

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

Refund Transfer Product Fees. Refund transfer fees are specific to the tax products offered by Refund Advantage and EPS. These fees are for products, services such as payment processing, and product referral commissions. Software partner fees paid and/or incurred are recorded on a net basis. The Company’s obligation for product fees and commissions is satisfied at the time of the product delivery and obligation for payment processing is satisfied at the time of processing. The transaction price for such activity is based upon stand-alone fees within the terms and conditions. At March 31, 2021 and September 30, 2020, there were 0 receivables related to refund transfer fees, which reflect earned revenue with unconditional rights to payment for product fee income. All refund transfer fees are recorded within the Consumer reporting segment.


41

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

Bank and Deposit Fees. Fees are earned on depository accounts for consumer and commercial customers and include fees for account services, overdraft services, safety deposit box rentals, and event-driven services (i.e. returned checks, ATM surcharge, card replacement, wire transfers, and stop pays). The Company’s obligation for event-driven services is satisfied at the time of the event when the service is delivered, while its obligation for account services is satisfied over the course of each month. The Company’s obligation for overdraft services is satisfied at the time of overdraft. The transaction price for such activity is based upon stand-alone fees within the terms and conditions of the deposit agreements. Bank and deposit fees are recorded within both the Consumer and Commercial reporting segments, the majority of which are derived from the Company's payments divisions. Bank and deposit fees related to the Community Bank are reported within other bank and deposit fees.

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

NOTE 17. SEGMENT REPORTING

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.

The Company reports its results of operations through the following 3 business segments: Consumer, Commercial, and Corporate Services/Other. The Meta Payment Systems and Tax Services divisions, as well as the Consumer Credit Products and ClearBalance business lines, are reported in the Consumer segment. The Crestmark and AFS divisions are reported in the Commercial segment. The Community Bank division, Warehouse Finance, and Student Loan lending portfolio are included in the Corporate Services/Other segment. The Corporate Services/Other segment also includes certain shared services as well as treasury related functions such as the investment portfolio, wholesale deposits and borrowings. The Company does not report indirect general and administrative expenses in the Consumer and Commercial segments. Beginning October 1, 2020, Warehouse Finance, formerly reported in the Consumer segment, is now included in the Corporate Services/Other segment. Prior periods have been reclassified to conform to the current presentation.

42

The Company adopted ASU 2018-02 as of October 1, 2020. The amendments in this ASU allow for a reclassification from AOCI to Retained Earnings for stranded tax effects from the Tax Cuts and Jobs Act of 2017 ("TCJA"). For the Company, these amendments are limited to any unrealized gains and losses held in Other Comprehensive Income for debt securities AFS held at the time of the TCJA enactment. The Company determined there were no stranded tax effects from the TCJA enactment and has not made any reclassification from AOCI to Retained Earnings upon adoption of this ASU.

The following tables present segment data for the Company:

Three Months Ended March 31, 2021
(Dollars in Thousands)ConsumerCommercialCorporate
Services/Other
Total
Net interest income$25,085 $42,404 $6,361 $73,850 
Provision for credit losses28,020 2,203 67 30,290 
Noninterest income98,041 13,940 1,472 113,453 
Noninterest expense30,189 27,829 37,953 95,971 
Income (loss) before income tax expense64,917 26,312 (30,187)61,042 
Total assets531,305 3,030,088 6,228,730 9,790,123 
Total goodwill87,145 222,360 309,505 
Total deposits8,447,910 12,177 182,326 8,642,413 

Three Months Ended March 31, 2020
(Dollars in Thousands)ConsumerCommercialCorporate
Services/Other
Total
Net interest income$16,162 $37,026 $14,549 $67,737 
Provision for loan and lease losses19,570 11,994 5,732 37,296 
Noninterest income83,208 15,523 21,782 120,513 
Noninterest expense30,450 27,361 33,918 91,729 
Income (loss) before income tax expense49,350 13,194 (3,319)59,225 
Total assets387,871 2,529,665 2,926,329 5,843,865 
Total goodwill87,145 222,360 309,505 
Total deposits3,078,481 9,214 874,709 3,962,404 

Six Months Ended March 31, 2021
(Dollars in Thousands)ConsumerCommercialCorporate
Services/Other
Total
Net interest income$47,432 $84,252 $8,165 $139,849 
Provision for credit losses30,386 8,670 (2,677)36,379 
Noninterest income123,376 29,106 6,426 158,908 
Noninterest expense48,351 54,997 65,198 168,546 
Income (loss) before income tax expense92,071 49,691 (47,930)93,832 
Total assets531,305 3,030,088 6,228,730 9,790,123 
Total goodwill87,145 222,360 309,505 
Total deposits8,447,910 12,177 182,326 8,642,413 

43

Six Months Ended March 31, 2020
(Dollars in Thousands)ConsumerCommercialCorporate
Services/Other
Total
Net interest income$32,719 $76,762 $22,907 $132,388 
Provision for loan and lease losses20,544 15,695 4,464 40,703 
Noninterest income107,972 30,502 19,521 157,995 
Noninterest expense47,190 54,086 66,250 167,526 
Income (loss) before income tax expense72,957 37,483 (28,286)82,154 
Total assets387,871 2,529,665 2,926,329 5,843,865 
Total goodwill87,145 222,360 309,505 
Total deposits3,078,481 9,214 874,709 3,962,404 

NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS

ASC 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.

The fair value hierarchy is as follows:

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

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

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

Debt Securities Available for Sale and Held to Maturity. Debt securities available for sale are recorded at fair value on a recurring basis and debt securities held to maturity are carried at amortized cost.
 
The fair value of debt securities available for sale, categorized primarily as Level 2, is recorded using prices obtained from independent asset pricing services that are based on observable transactions, but not quoted markets. Management reviews the prices obtained from independent asset pricing servicing for unusual fluctuations and comparison to current market trading activity.

Equity Securities. Marketable equity securities and certain non-marketable equity securities are recorded at fair value on a recurring basis. The fair values of marketable equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).

44

The following tables summarize the fair values of debt securities available for sale and equity securities as they are measured at fair value on a recurring basis:
 Fair Value At March 31, 2021
(Dollars in Thousands)TotalLevel 1Level 2Level 3
Debt securities AFS    
SBA securities$170,006 $$170,006 $
Obligations of states and political subdivisions2,816 0 2,816 0 
Non-bank qualified obligations of states and political subdivisions295,722 0 295,722 0 
Asset-backed securities453,403 0 453,403 0 
Mortgage-backed securities558,833 0 558,833 0 
Total debt securities AFS$1,480,780 $$1,480,780 $
Common equities and mutual funds(1)
$3,235 $3,235 $$
Non-marketable equity securities(2)
$4,265 $$$
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 2021 and September 30, 2020.
(2) Consists of certain non-marketable equity securities that are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

 Fair Value At September 30, 2020
(Dollars in Thousands)TotalLevel 1Level 2Level 3
Debt securities AFS    
SBA securities$164,955 $$164,955 $
Obligations of states and political subdivisions841 0 841 0 
Non-bank qualified obligations of states and political subdivisions323,774 323,774 
Asset-backed securities324,925 324,925 
Mortgage-backed securities453,607 0 453,607 0 
Total debt securities AFS$1,268,102 $$1,268,102 $
Common equities and mutual funds(1)
$2,969 $2,969 $$
Non-marketable equity securities(2)
$2,784 $$$
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 2021 and September 30, 2020.
(2) Consists of certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

Foreclosed Real Estate and Repossessed Assets. Real estate properties and repossessed assets are initially recorded at the fair value less selling costs at the date of foreclosure, establishing a new cost basis. The carrying amount represents the lower of the new cost basis or the fair value less selling costs of foreclosed assets that were measured at fair value subsequent to their initial classification as foreclosed assets.

Loans and Leases. The Company does not record loans and leases at fair value on a recurring basis. However, if a loan or lease is individually evaluated for risk of credit loss and repayment is expected to be solely provided by the values of the underlying collateral, the Company measures fair value on a nonrecurring basis. Fair value is determined by the fair value of the underlying collateral less estimated costs to sell. The fair value of the collateral is determined based on internal estimates and/or assessments provided by third-party appraisers and the valuation relies on discount rates ranging from 4% to 90%.

45

The following table summarizes the assets of the Company that are measured at fair value in the Condensed Consolidated Statements of Financial Condition on a non-recurring basis:

 Fair Value At March 31, 2021
(Dollars in Thousands)TotalLevel 1Level 2Level 3
Impaired loans and leases, net    
Commercial finance$6,830 $$$6,830 
Total National Lending6,830 6,830 
Commercial real estate and operating9,029 9,029 
Total Community Banking9,029 9,029 
     Total impaired loans and leases, net15,859 15,859 
Foreclosed assets, net1,483 1,483 
Total$17,342 $$$17,342 

 Fair Value At September 30, 2020
(Dollars in Thousands)TotalLevel 1Level 2Level 3
Impaired loans and leases, net    
Commercial finance$9,240 $$$9,240 
Total National Lending9,240 9,240 
Commercial real estate and operating20 20 
Total Community Banking20 20 
     Total impaired loans and leases, net9,260 9,260 
Foreclosed assets, net9,957 9,957 
Total$19,217 $$$19,217 

 Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)
Fair Value at
March 31, 2021
Fair Value at
September 30, 2020
Valuation
Technique
Unobservable InputRange of Inputs
Impaired loans and leases, net$15,859 9,260 Market approach
Appraised values(1)
4% - 90%
Foreclosed assets, net$1,483 9,957 Market approach
Appraised values(1)
4% - 30%
(1) The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs and other inputs in a range of 4% to 90%.

Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Condensed Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair value estimates were made at March 31, 2021 and September 30, 2020 based on relevant market information and information about financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or a liability could be settled. However, since there is no active market for certain financial instruments of the Company, the estimates of fair value are subjective in nature, involve uncertainties, and include matters of significant judgment. Changes in assumptions as well as tax considerations could significantly affect the estimated values. Accordingly, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.

46

The following tables present the carrying amount and estimated fair value of the financial instruments held by the Company:
 March 31, 2021
(Dollars in Thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets
Cash and cash equivalents$3,724,242 $3,724,242 $3,724,242 $$
Debt securities available for sale1,480,780 1,480,780 1,480,780 
Debt securities held to maturity72,112 73,294 73,294 
Common equities and mutual funds(1)
3,235 3,235 3,235 
Non-marketable equity securities(1)(2)
18,015 18,015 13,750 
Loans held for sale67,635 67,635 67,635 
Loans and leases receivable3,648,028 3,655,832 3,655,832 
Federal Reserve Bank and Federal Home Loan Bank stocks28,433 28,433 28,433 
Accrued interest receivable17,429 17,429 17,429 
Financial liabilities
Deposits8,642,413 8,642,560 8,600,335 42,225 
Other short- and long-term borrowings95,336 97,259 97,259 
Accrued interest payable679 679 679 
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 2021 and September 30, 2020.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

 September 30, 2020
(Dollars in Thousands)Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets
Cash and cash equivalents$427,367 $427,367 $427,367 $$
Debt securities available for sale1,268,102 1,268,102 1,268,102 
Debt securities held to maturity92,610 93,745 93,745 
Common equities and mutual funds(1)
2,969 2,969 2,969 
Non-marketable equity securities(1)(2)
14,784 14,784 12,000 
Loans held for sale183,577 183,577 183,577 
Loans and leases receivable3,314,140 3,307,037 3,307,037 
Federal Reserve Bank and Federal Home Loan Bank stocks27,138 27,138 27,138 
Accrued interest receivable16,628 16,628 16,628 
Financial liabilities
Deposits4,979,200 4,980,073 4,705,028 275,045 
Overnight federal funds purchased
Federal Home Loan Bank advances
Other short- and long-term borrowings98,224 100,185 100,185 
Accrued interest payable1,923 1,923 1,923 
(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 2021 and September 30, 2020.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.

47

NOTE 19. SUBSEQUENT EVENTS

Management has evaluated subsequent events that occurred after March 31, 2021. During this period, up to the filing date of this Quarterly Report on Form 10-Q, management identified the following subsequent event:

The Bank is reorganizing its payments team to best support its emerging and established customers. In connection with this realignment, Sheree S. Thornsberry, Executive Vice President and Head of Payments of the Bank, will no longer be employed in her position effective May 7, 2021.

48

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

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

You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results; expectations in connection with the impact of the ongoing COVID-19 pandemic and related governmental actions on the Company and MetaBank; industry and the capital markets; customer retention; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto including the deployment and efficacy of the COVID-19 vaccines, or other unusual and infrequently occurring events; actual changes in interest rates and the Fed Funds rate; additional changes in tax laws; the strength of the United States' economy, in general, and the strength of the local economies in which the Company operates; changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); inflation, market, and monetary fluctuations; the timely and efficient development of, and acceptance of, new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s refund advance business, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Meta’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by our regulators; the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry and recent and potential changes in response to the ongoing COVID-19 pandemic, including various laws and the rules and regulations that may be promulgated thereunder; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by MetaBank of its status as a well-capitalized institution; changes in consumer spending and saving habits; the impact of our participation as prepaid card issuer for the EIP program and potentially similar programs in the future; losses from fraudulent or illegal activity; technological risks and developments, and cyber threats, attacks or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2020, and in other filings made with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.


49

GENERAL

The Company, a registered bank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis.

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.”

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2021, compared to September 30, 2020, and the consolidated results of operations for the three and six months ended March 31, 2021 and 2020. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2020 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

EXECUTIVE SUMMARY

Business Developments
The following highlights certain business developments during the quarter ended March 31, 2021:

Increased revenue included the benefits of H&R Block's suite of financial services products.

Partnered with the U.S. Department of the Treasury's Bureau of the Fiscal Service ("Fiscal Service") to disperse Economic Income Payment ("EIP") stimulus payments through the distribution of prepaid cards. During the quarter, the Company began distributing cards under the authorizations for the second round on January 4, 2021 and for the third round on March 23, 2021.

Selected as the issuing bank for Walgreens' newly launched bank-account product with InComm Payments and MasterCard, adding to the Bank's diverse suite of Banking as a Service relationships.

Expanded our solar lending business, increasing our solar lending originations for the first six months of the fiscal year 2021 by 65% to $58.5 million.

Dedicated additional resources to our Environmental, Social, and Governance ("ESG") activities to include the hiring a Chief People and Inclusion Officer, Kia Tang.

Financial Highlights for the 2021 Fiscal Second Quarter
Total revenue for the fiscal 2021 second quarter was $187.3 million, a slight decrease compared to $188.3 million for the same quarter in fiscal 2020, which benefited from the one-time $19.3 million gain from the divestiture of the Community Bank division.

Net interest income for the second quarter was $73.9 million, compared to $67.7 million in the comparable quarter of the prior year. The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall yields realized on investments and loans and leases. Net interest margin ("NIM") decreased to 3.07% for the fiscal 2021 second quarter from 4.78% during the same period of last year, chiefly reflecting excess cash associated with the Company's participation in the EIP program, as described further below.

The Company's total gross loans and leases at March 31, 2021 increased $37.2 million, or 1%, to $3.65 billion, compared to March 31, 2020. Average deposits from the payments divisions for the fiscal 2021 second quarter increased nearly 181% to $9.29 billion when compared to the same quarter of the prior year. A significant portion of the year-over-year increase reflected the Company's participation in the EIP program, as described further below. The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021 second quarter, compared to 0.83% during the prior year quarter, primarily due to an increase in the average balance of the Company's noninterest-bearing deposits from the EIP program.


50

Noninterest income for the three months ended March 31, 2021 decreased to $113.5 million, compared to $120.5 million for the same period of the prior year. This decrease was primarily due to the $19.3 million gain on divestiture of the Community Bank division, which was recognized during the fiscal 2020 second quarter. Partially offsetting the decrease were increases in total tax product fee income and payment card and deposit fee income.

Noninterest expense increased 5% to $96.0 million for the fiscal 2021 second quarter, from $91.7 million for the same quarter of last year, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals and additional employees to support growth.

The Company repurchased 734,984 shares during the second quarter at an average price of $40.78.

Tax Season
For the 2021 tax season, the Bank originated $1.79 billion in refund advance loans compared to $1.33 billion during the 2020 tax season.

During the fiscal 2021 second quarter, total tax services product revenue was $67.0 million, an increase of 17% compared to the fiscal 2020 second quarter.

While the 2021 tax services results have thus far been favorable compared to the prior year's tax season, it has been below the Company's expectations as a result of reduced overall demand for refund advances due to consumers having access to EIP stimulus funds, which have been partially offset by higher payments fee income. We do expect overall tax season refund transfer volumes and revenue to be similar to last year. We believe the impacts to the tax advance product are unique to this tax season and the Company anticipates more normalized results from its H&R Block and Jackson Hewitt relationships will be achieved in the 2022 tax season and beyond. Despite these stimulus-related impacts, total tax services product income, net of losses and direct product expenses, increased 14% when comparing the first six months of fiscal 2021 to the same period of the prior fiscal year.

EIP Program Update
The Bank is serving as the sole Financial Agent for distributing prepaid debit cards used in the EIP program. In 2020, the Bank dispensed approximately $6.42 billion of the first round of EIP payments under the CARES Act through the distribution of 3.6 million Bank-issued prepaid cards, and earlier this year dispensed approximately $7.10 billion of the second round of EIP payments under the CAA through the distribution of 8.1 million Bank-issued prepaid cards.

On March 11, 2021, the U.S. Congress, through the ARP Act, directed the Internal Revenue Service, to distribute a third round of EIP via the U.S. Treasury to persons in the U.S. eligible to receive them. The Bank has entered into an amendment of its existing agreement with the Fiscal Service under which the Bank acts as its Financial Agent in connection with the provision of prepaid debit card services to disburse a portion of the EIP payments to eligible recipients via Bank-issued prepaid cards. Through this third round, the Bank disbursed approximately $10.64 billion of EIP payments through the distribution of 4.7 million Bank-issued prepaid cards.

Through March 31, 2021 the Bank has issued a combined total of 16.5 million prepaid cards totaling approximately $24.15 billion related to three stimulus programs, of which $11.64 billion is still outstanding as of March 31, 2021. Of that balance, only $869.2 million remained on Meta’s balance sheet, as MetaBank has been working with other banks to transfer these temporary deposits off the balance sheet.

The Company anticipates that participating in the EIP card distribution program will continue to have a slightly positive impact on earnings and it does not expect any material impact on its risk-based capital ratios due to the participation in the card distribution program. Additionally, the Company does not expect these conditions will be sustained over the long-term.

COVID-19 Business Update
As of March 31, 2021, the Company had 576 loans outstanding with total loan balances of $208.6 million originated as part of the PPP, compared with 612 loans outstanding with total loan balances of $194.3 million for the quarter ended December 31, 2020.


51

As of March 31, 2021, $66.5 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As of December 31, 2020, loans and leases totaling $84.2 million were within their deferment period.

The Company's capital position remained in good standing as of March 31, 2021, even while continuing to absorb the temporary impact resulting from the receipt of deposits in conjunction with EIP payments described below. In addition, the Company has options available that can be used to effectively manage capital levels, including a strong and flexible balance sheet.

FINANCIAL CONDITION

At March 31, 2021, the Company’s total assets increased by $3.70 billion to $9.79 billion compared to September 30, 2020, primarily due to a $3.30 billion increase in cash and cash equivalents.

Total cash and cash equivalents was $3.72 billion at March 31, 2021, increasing from $427.4 million at September 30, 2020, primarily resulting from the receipt of EIP related deposits. The Bank has been working with other banks to transfer these temporary deposits off the balance sheet. Otherwise, the Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the FRB. At March 31, 2021, the Company did not have any federal funds sold.

The total investment portfolio increased $192.2 million, or 14%, to $1.55 billion at March 31, 2021, compared to $1.36 billion at September 30, 2020, as purchases exceeded maturities and principal pay downs. The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. All MBS held by the Company at March 31, 2021 were issued by a U.S. Government agency or instrumentality. Of the total MBS at March 31, 2021, $558.8 million, at fair value, were classified as available for sale, and $4.4 million, at cost, were classified as held to maturity. Of the total investment securities at March 31, 2021, $921.9 million, at fair value, were classified as available for sale and $67.7 million, at cost, were classified as held to maturity. During the six months ended March 31, 2021, the Company purchased $411.5 million of investment securities.

Loans held for sale at March 31, 2021 totaled $67.6 million, decreasing from $183.6 million at September 30, 2020. This decrease was primarily driven by sales of the retained Community Bank loan portfolio to Central Bank during the six months ended March 31, 2021.

The Company’s total loans and leases increased $333.9 million, or 10%, to $3.65 billion at March 31, 2021, from $3.31 billion at September 30, 2020. The increase was primarily driven by growth in the commercial finance and tax services portfolios partially offset by the continued decrease in community banking loan balances. See Note 6 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

National lending loans and leases increased $471.4 million, or 17% to $3.30 billion at March 31, 2021 compared to September 30, 2020. Within the National Lending portfolios, commercial finance loans and leases increased $197.9 million, tax services loans increased $222.9 million, consumer finance increased $11.5 million and warehouse finance increased $39.1 million at March 31, 2021 compared to September 30, 2020. The increase in commercial finance loan balances was largely driven by the term lending and asset based lending categories. The seasonality of the Company's tax services business led to the increase in tax services loans at March 31, 2021 compared to September 30, 2020.

Community banking loans decreased $137.5 million, or 28%, at March 31, 2021 compared to September 30, 2020, primarily attributable to loan portfolio sales along with continued principal payments and payoffs. As of March 31, 2021, the Company had no community banking loans classified as held for sale.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the Federal Reserve Bank. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in these stocks increased $1.3 million, or 5%, to $28.4 million at March 31, 2021 from $27.1 million at September 30, 2020, resulting from the purchase of FHLB membership stock.
52


Total end-of-period deposits increased $3.66 billion, or 74%, at March 31, 2021 to $8.64 billion as compared to September 30, 2020, primarily driven by an increase in noninterest-bearing deposits of $3.57 billion, which was largely attributable to the balances on the EIP cards.

The average balance of total deposits and interest-bearing liabilities was $7.57 billion for the six-months ended March 31, 2021, compared to $5.39 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the six-months ended March 31, 2021 increased $3.94 billion, or 133%, to $6.90 billion compared to the same period in the prior year. These increases were primarily attributable to EIP related deposit balances.
 
The Company's total borrowings decreased $2.9 million, or 3%, from $98.2 million at September 30, 2020 to $95.3 million at March 31, 2021. The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at March 31, 2021.

At March 31, 2021, the Company’s stockholders’ equity totaled $835.3 million, a decrease of $12.1 million, from $847.3 million at September 30, 2020. The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital. The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2021, continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See “Liquidity and Capital Resources” for further information.

Payments Noninterest-bearing Checking Deposits
The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's 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 an amount that is estimated to be less than final breakage values on card programs. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to one partner.
Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category.

The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the payments division:

(Dollars in Thousands)March 31, 2021September 30, 2020
Noninterest-bearing deposits$8,338,473 $4,960,276 
Prefunding(325,640)(528,131)
Discount funding(73,127)(62,443)
DDA overdrafts(11,471)(13,072)
Noninterest-bearing checking, net$7,928,235 $4,356,630 

RESULTS OF OPERATIONS
 
General
The Company recorded net income of $59.1 million, or $1.84 per diluted share, for the three months ended March 31, 2021, compared to net income of $52.3 million, or $1.45 per diluted share, for the three months ended March 31, 2020. Total revenue for the fiscal 2021 second quarter was $187.3 million, compared to $188.3 million for the same quarter in fiscal 2020, a slight decrease. The increase in net income was primarily driven by an increase in net interest income and a decrease in provision for credit loss expense.
53


The Company recorded net income of $87.1 million, or $2.65 per diluted share, for the six months ended March 31, 2021, compared to $73.4 million, or $2.00 per diluted share, compared to the same period in the prior year. Total revenue for the six months ended March 31, 2021 was $298.8 million, compared to $290.4 million for the same period of the prior year, an increase of 3%.

Net Interest Income
Net interest income for the fiscal 2021 second quarter was $73.9 million, an increase of 9%, from $67.7 million for the same quarter in fiscal 2020. The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall yields realized on investments and loans and leases. For the six months ended March 31, 2021, net interest income was $139.8 million, an increase of 6%, from $132.4 million compared to the same period in the prior year.

During the fiscal 2021 second quarter, interest expense decreased $9.8 million which was partially offset by decreases in loan and lease interest income of $2.0 million and investment securities and cash interest income of $1.7 million, when comparing to the prior year quarter. The quarterly average outstanding balance of loans and leases increased by 8% on a linked quarter basis primarily due to seasonal tax services loans with growth from Term Lending, Asset Based Lending, and SBA/USDA, partially offset by lower community bank loan balances. The Company’s average interest-earning assets for the fiscal 2021 second quarter increased by $4.07 billion, to $9.77 billion compared with the second quarter in fiscal 2020, primarily due to the effects of the EIP program.

NIM decreased to 3.07% in the fiscal 2021 second quarter from 4.78% for the comparable quarter last year. The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 249 basis points to 3.15% for the fiscal 2021 second quarter compared to the prior year quarter, driven primarily by excess low-yielding cash held at the Federal Reserve, as well as the lower interest rate environment. The fiscal 2021 second quarter TEY on the securities portfolio was 1.78% compared to 2.68% for the comparable period last year.

For the six months ended March 31, 2021, NIM was 3.65%, decreasing 121 basis points from 4.86% compared to the same period in the prior year. Net interest margin, tax-equivalent for the six months ended March 31, 2021 was 3.67%, a decrease of 123 basis points compared to the same period in the prior year.

The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021 second quarter, compared to 0.83% during the prior year quarter. This reflected primarily an increase in the average balance of the Company's noninterest-bearing deposits, mainly due to the EIP program noted above. The Company's overall cost of deposits was 0.02% in the fiscal 2021 second quarter, compared to 0.66% in the same quarter last year.

The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.
54

Three Months Ended March 31,
20212020
(Dollars in Thousands)Average
Outstanding
Balance
Interest
Earned /
Paid
Yield /
Rate(1)
Average
Outstanding
Balance
Interest
Earned /
Paid
Yield /
Rate(1)
Interest-earning assets:      
Cash & fed funds sold$4,187,558 $1,090 0.11 %$196,754 $739 1.51 %
Mortgage-backed securities543,256 2,607 1.95 %358,103 2,493 2.80 %
Tax exempt investment securities297,299 1,132 1.96 %454,177 2,132 2.39 %
Asset-backed securities389,406 1,290 1.34 %304,674 2,271 3.00 %
Other investment securities230,168 1,077 1.90 %192,379 1,275 2.67 %
Total investments1,460,129 6,106 1.78 %1,309,333 8,171 2.68 %
Total commercial finance2,471,694 46,299 7.60 %2,020,358 41,643 8.29 %
Total consumer finance255,625 6,968 11.06 %264,307 5,386 8.20 %
Total tax services714,789 6,544 3.71 %516,491 6,351 4.95 %
Total warehouse finance315,162 4,845 6.23 %314,474 4,785 6.12 %
National Lending loans and leases3,757,270 64,656 6.98 %3,115,630 58,165 7.51 %
Community Banking loans363,285 3,817 4.26 %1,080,142 12,328 4.59 %
Total loans and leases4,120,555 68,473 6.74 %4,195,772 70,493 6.76 %
Total interest-earning assets9,768,242 $75,669 3.15 %5,701,859 $79,403 5.64 %
Noninterest-earning assets887,610 909,040 
Total assets$10,655,852 $6,610,899 
Interest-bearing liabilities:
Interest-bearing checking(2)
$275,982 $— — %$182,107 $105 0.23 %
Savings77,562 0.02 %46,592 0.05 %
Money markets56,352 42 0.30 %68,421 153 0.90 %
Time deposits12,820 34 1.07 %84,940 427 2.02 %
Wholesale deposits175,777 365 0.84 %1,476,085 7,551 2.06 %
Total interest-bearing deposits598,493 445 0.30 %1,858,145 8,242 1.78 %
Overnight fed funds purchased— — — %372,596 1,307 1.41 %
FHLB advances— — — %110,000 670 2.45 %
Subordinated debentures73,864 1,147 6.30 %73,698 1,158 6.32 %
Other borrowings22,377 227 4.12 %28,714 289 4.04 %
Total borrowings96,241 1,374 5.79 %585,008 3,424 2.35 %
Total interest-bearing liabilities694,734 1,819 1.06 %2,443,153 11,666 1.92 %
Noninterest-bearing deposits8,967,067 — — %3,199,148 — — %
Total deposits and interest-bearing liabilities9,661,801 $1,819 0.08 %5,642,301 $11,666 0.83 %
Other noninterest-bearing liabilities177,372 136,759 
Total liabilities9,839,173 5,779,060 
Shareholders' equity816,679 831,839 
Total liabilities and shareholders' equity$10,655,852 $6,610,899 
Net interest income and net interest rate spread including noninterest-bearing deposits$73,850 3.08 %$67,737 4.81 %
Net interest margin3.07 %4.78 %
Tax-equivalent effect0.01 %0.04 %
Net interest margin, tax-equivalent(3)
3.08 %4.82 %
(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2021 and 2020 was 21%.
(2) Of the total balance, $275.7 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.
55

Six Months Ended March 31,
20212020
(Dollars in Thousands)Average
Outstanding
Balance
Interest
Earned /
Paid
Yield /
Rate(1)
Average
Outstanding
Balance
Interest
Earned /
Paid
Yield /
Rate(1)
Interest-earning assets:      
Cash & fed funds sold$2,485,330 $1,932 0.16 %$147,910 $1,151 1.56 %
Mortgage-backed securities490,358 4,730 1.93 %367,280 4,882 2.66 %
Tax exempt investment securities315,714 2,348 1.89 %472,680 4,471 2.39 %
Asset-backed securities357,514 2,490 1.40 %304,278 4,626 3.04 %
Other investment securities226,032 2,186 1.94 %194,960 2,704 2.77 %
Total investments1,389,618 11,754 1.79 %1,339,198 16,683 2.67 %
Total commercial finance2,444,396 91,928 7.54 %2,000,325 86,423 8.64 %
Total consumer finance247,534 11,716 9.49 %267,477 11,176 8.36 %
Total tax services366,157 6,553 3.59 %269,115 6,385 4.74 %
Total warehouse finance299,510 9,778 6.55 %289,885 8,960 6.18 %
National Lending loans and leases3,357,597 119,975 7.17 %2,826,802 112,944 7.99 %
Community Banking loans447,096 10,153 4.55 %1,137,423 26,251 4.62 %
Total loans and leases3,804,693 130,128 6.86 %3,964,225 139,195 7.02 %
Total interest-earning assets7,679,641 $143,814 3.77 %5,451,333 $157,029 5.80 %
Noninterest-earning assets866,262 914,034 
Total assets$8,545,903 $6,365,367 
Interest-bearing liabilities:
Interest-bearing checking(2)
$218,743 $— — %$172,850 $259 0.30 %
Savings64,741 0.02 %47,690 16 0.07 %
Money markets54,466 81 0.30 %74,507 357 0.96 %
Time deposits15,130 91 1.20 %100,014 1,022 2.04 %
Wholesale deposits218,925 1,063 1.97 %1,474,444 15,929 2.16 %
Total interest-bearing deposits572,005 1,241 0.44 %1,869,505 17,583 1.88 %
Overnight fed funds purchased— 0.25 %337,509 2,757 1.63 %
FHLB advances— — — %110,000 1,348 2.45 %
Subordinated debentures73,841 2,294 6.23 %73,678 2,318 6.29 %
Other borrowings23,132 430 3.73 %31,165 635 4.08 %
Total borrowings96,979 2,724 5.63 %552,352 7,058 2.56 %
Total interest-bearing liabilities668,984 3,965 1.19 %2,421,857 24,641 2.03 %
Noninterest-bearing deposits6,901,255 — — %2,964,329 — — %
Total deposits and interest-bearing liabilities7,570,239 $3,965 0.11 %5,386,186 $24,641 0.91 %
Other noninterest-bearing liabilities164,307 143,576 
Total liabilities7,734,546 5,529,762 
Shareholders' equity811,357 835,605 
Total liabilities and shareholders' equity$8,545,903 $6,365,367 
Net interest income and net interest rate spread including noninterest-bearing deposits$139,849 3.67 %$132,388 4.89 %
Net interest margin3.65 %4.86 %
Tax-equivalent effect0.02 %0.04 %
Net interest margin, tax-equivalent(3)
3.67 %4.90 %
(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2021 and 2020 was 21%.
(2) Of the total balance, $218.5 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.


56

Provision for Credit Losses
The Company recorded a $30.3 million and a $36.4 million provision for credit losses for the three and six months ended March 31, 2021, as compared to a $37.3 million and $40.7 million provision for credit losses for the same period of the prior year. The decrease in the overall provision compared to the prior year was due in large part to the increase in the allowance as part of the Company's response to the emerging COVID-19 pandemic during the fiscal 2020 second quarter. Partially offsetting that decrease was an increase in provision expense related to originating higher volumes of tax services loans for the fiscal 2021 second quarter, compared to the comparable quarter of the prior year.

Noninterest Income
Noninterest income for the fiscal 2021 second quarter decreased to $113.5 million from $120.5 million for the same period in the prior fiscal year. This was due primarily to the $19.3 million gain on divestiture of the Community Bank division, which was recognized during the fiscal 2020 second quarter. Partially offsetting the decrease were increases in total tax product fee income and payment card and deposit fee income.

Noninterest income for the six months ended March 31, 2021 increased by $0.9 million, or 1%, to $158.9 million compared to the same period in the prior fiscal year.

Noninterest Expense
Noninterest expense increased 5% to $96.0 million for the fiscal 2021 second quarter, from $91.7 million for the same quarter of fiscal 2020, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals and additional employees to support growth.

Noninterest expense for the six months ended March 31, 2021 increased by $1.0 million, or 1%, to $168.5 million compared to the same period in the prior fiscal year.

Income Tax Expense
The Company recorded an income tax expense of $1.1 million, representing an effective tax rate of 1.9%, for the fiscal 2021 second quarter, compared to an income tax expense of $5.6 million, representing an effective tax rate of 9.5%, for the fiscal 2020 second quarter.

The Company originated $20.0 million in solar leases during the fiscal 2021 second quarter, compared to $17.6 million during the fiscal 2020 second quarter. The investment tax credit for the second quarter reflected an adjustment to the full fiscal year's projected investment tax credit volumes, which contributed to the overall reduction in income tax expense compared to the prior year. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

Nonperforming Assets and Allowance for Loan and Lease Losses

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

Loans and leases, or portions thereof, are charged-off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired.

57

The Company believes that the level of allowance for credit losses at March 31, 2021 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See the section below titled “Allowance for Credit Losses” for further information.
 
The table below sets forth the amounts and categories of nonperforming assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.

(Dollars in Thousands)March 31, 2021September 30, 2020
Nonperforming loans and leases
Nonaccruing loans and leases: 
Term lending$14,665 $16,274 
Asset based lending382 — 
Factoring35 1,096 
Lease financing2,623 3,583 
SBA/USDA600 600 
Commercial finance18,305 21,553 
Total National Lending18,305 21,553 
Commercial real estate and operating17,896 580 
Consumer one-to-four family real estate and other159 50 
Agricultural real estate and operating1,769 1,769 
Total Community Banking19,824 2,399 
Total38,129 23,952 
Accruing loans and leases delinquent >89 days past due: 
Term lending353 266 
Lease financing2,043 4,344 
Insurance premium finance2,414 2,364 
SBA/USDA— 427 
Commercial finance4,810 7,401 
Consumer credit products243 499 
Other consumer finance274 373 
Consumer finance517 872 
Tax services— 1,743 
Total National Lending5,327 10,016 
Commercial real estate and operating— 50 
Total Community Banking— 50 
Total5,327 10,066 
Total nonperforming loans and leases43,456 34,018 
Other assets 
Nonperforming operating leases1,799 4,045 
Foreclosed and repossessed assets: 
Commercial finance1,483 9,957 
Total1,483 9,957 
Total other assets3,282 14,002 
Total nonperforming assets$46,738 $48,020 
Total as a percentage of total assets0.48 %0.79 %
 

58

At March 31, 2021, nonperforming loans and leases totaled $43.5 million, representing 1.17% of total loans and leases, compared to $34.0 million, or 0.97% of total loans and leases at September 30, 2020.

As of March 31, 2021, $66.5 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As of September 30, 2020, loans and leases totaling $170.0 million were within their deferment period.

Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,”