PATHWARD FINANCIAL, INC.
AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Meta Financial Group , Inc.® ("Meta" or "the Company" or "us") and its
wholly-owned subsidiary, MetaBank®, National Association ("MetaBank" or "the
Bank") may from time to time make written or oral "forward-looking statements,"
including statements contained in this Quarterly Report on Form 10-Q, the
Company's other filings with the Securities and Exchange Commission (the "SEC"),
the Company's reports to stockholders, and other communications by the Company
and MetaBank, which are made in good faith by the Company pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by words such as "may," "hope,"
"will," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "continue," "could," "future," or the
negative of those terms, or other words of similar meaning or similar
expressions. You should carefully read statements that contain these words
because they discuss our future expectations or state other "forward-looking"
information. These forward-looking statements are based on information currently
available to us and assumptions about future events, and include statements with
respect to the Company's beliefs, expectations, estimates, and intentions, which
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond the Company's control. Such
risks, uncertainties and other factors may cause our actual growth, results of
operations, financial condition, cash flows, performance and business prospects
and opportunities to differ materially from those expressed in, or implied by,
these forward-looking statements. Such statements address, among others, the
following subjects: future operating results; expectations in connection with
the impact of the ongoing COVID-19 pandemic and related governmental actions on
the Company and MetaBank; customer retention; loan and other product demand;
important components of the Company's statements of financial condition and
operations; growth and expansion; expectations concerning the Company's
acquisitions and divestitures, including potential benefits of, and other
expectations for the Company in connection with, such transactions; new products
and services, such as those offered by MetaBank or the Company's payments
divisions (which include Meta Payment Systems, Refund Advantage, EPS Financial
and Specialty Consumer Services); credit quality and adequacy of reserves;
technology; and the Company's employees. The following factors, among others,
could cause the Company's financial performance and results of operations to
differ materially from the expectations, estimates, and intentions expressed in
such forward-looking statements: maintaining our executive management team;
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, or other unusual and
infrequently occurring events; factors relating to the Company's share
repurchase program; actual changes in interest rates and the Fed Funds rate;
additional changes in tax laws; the strength of the United States' economy, in
general, and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary, and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), as well as efforts of the United
States Congress and the United States Treasury in conjunction with bank
regulatory agencies to stimulate the economy and protect the financial system;
inflation, market, and monetary fluctuations; the timely and efficient
development of, and acceptance of, new products and services offered by the
Company or its strategic partners, as well as risks (including reputational and
litigation) attendant thereto, and the perceived overall value of these products
and services by users; the risks of dealing with or utilizing third parties,
including, in connection with the Company's refund advance business, the risk of
reduced volume of refund advance loans as a result of reduced customer demand
for or acceptance of usage of Meta's strategic partners' refund advance
products; any actions which may be initiated by our regulators in the future;
the impact of changes in financial services laws and regulations, including, but
not limited to, laws and regulations relating to the tax refund industry and the
insurance premium finance industry and recent and potential changes in response
to the COVID-19 pandemic such as the CARES Act and the rules and regulations
that may be promulgated thereunder; our relationship with our primary
regulators, the Office of the Comptroller of the Currency and the Federal
Reserve , as well as the Federal Deposit Insurance Corporation , which insures
MetaBank's deposit accounts up to applicable limits; technological changes,
including, but not limited to, the protection of electronic files or databases;
acquisitions and divestitures; litigation risk; the growth of the Company's
business, as well as expenses related thereto; continued maintenance by MetaBank
of its status as a well-capitalized institution, particularly in light of our
growing deposit base, a portion of which has been characterized as "brokered;"
changes in consumer spending and saving habits; and the success of the Company
at maintaining its high quality asset level and managing and collecting assets
of borrowers in default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place
undue reliance on these forward-looking statements. The forward-looking
statements included in this Quarterly Report speak only as of the date hereof.
All subsequent written and oral forward-looking statements attributable to us or
any person acting on our behalf are expressly qualified in 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, 2019 , and in other filings made with the SEC . The Company
expressly disclaims any intent or obligation to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company or its subsidiaries, whether as a result of new
information, changed circumstances, or future events or for any other reason.
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GENERAL
The Company, a registered bank holding company, is a Delaware corporation, the
principal assets of which are all the issued and outstanding shares of the Bank,
a national bank. Unless the context otherwise requires, references herein to the
Company include Meta and the Bank, and all direct or indirect subsidiaries of
Meta on a consolidated basis.
The Company's common stock trades on the NASDAQ Global Select Market under the symbol "CASH."
The following discussion focuses on the consolidated financial condition of the Company atMarch 31, 2020 , compared toSeptember 30, 2019 , and the consolidated results of operations for the three and six months endedMarch 31, 2020 and 2019. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year endedSeptember 30, 2019 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 endedSeptember 30, 2019 .
EXECUTIVE SUMMARY
Impact and Response to COVID-19 Pandemic First and foremost, the Company is focused on the well-being of its employees, partners and customers. Preventative health measures were recently put in place to protect employees and customers including mandating remote work options and social distancing measures where possible, restricting non-essential business travel and enhancing preventative cleaning services at all office locations. The Company also enacted a COVID-19 Crisis Command Center consisting of leadership and business continuity planning resources throughout the organization to effectively monitor possible interruptions related to the pandemic and to ensure business continuity.
The Company's loan and lease portfolio is diversified by geography and industry.
While the Company has not experienced significant asset deterioration as of
•tighter underwriting standards; •monitoring and placing limits on originations to industries and customers most adversely impacted by the COVID-19 pandemic, including, but not limited to transportation, travel, entertainment, and retail; •contacting customers in order to assess their credit situations and needs; •offering flexible repayment options to current customers, when appropriate; and •utilizing CARES Act, SBA andUSDA programs and loan products to help our small business clients. The Company increased its allowance for loan and lease losses during the fiscal second quarter as a result of the emerging COVID-19 pandemic. The Company will continue to diligently monitor the allowance for loan and lease losses and adjust as necessary in future periods to maintain an appropriate and supportable level. As ofMarch 31, 2020 , the Company remained well-capitalized, and management believes there is sufficient capital to withstand an extended economic recession. The Bank's capital leverage ratio based on average assets was 8.52% asMarch 31, 2020 , which is seasonally low due to higher asset levels driven by the tax services business. To further ensure the Company's capital position remains strong while facing the current economic uncertainties, the Company suspended repurchase activity under its stock repurchase program inMarch 2020 until there is better visibility into the duration and economic impact associated with the pandemic. While the Company's capital ratios could be adversely impacted by future credit losses, management believes the Company has options available that can be used to effectively manage capital levels through these turbulent times, including a very strong and flexible balance sheet.
For additional related information, see "Regulation and Supervision" and "Risk Factors."
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Conversions of the Bank and the Company
Following receipt of the necessary regulatory approvals from the Office of the
Comptroller of the Currency and the Federal Reserve Bank of Minneapolis (the
"FRB"), on April 1, 2020 , the Bank converted from a federal thrift charter to a
national bank charter and the Company converted from a savings and loan holding
company to a bank holding company that has elected treatment as a financial
holding company. The Bank will now operate under the name "MetaBank, National
Association". The Company and the Bank effected these conversions in order to
more closely align the Bank's regulatory charter to its current and planned
focus on national business that provides innovative financial solutions to
consumers and businesses in niche markets often overlooked by traditional banks.
See "Regulation and Supervision" and "Risk Factors" for additional related
information.
Business Developments
Through May 4, 2020 , the Company authorized 673 applications, totaling $215.4
million in loan requests for the Paycheck Protection Program.
On April 29, 2020 , the Company entered into an amendment to its existing
agreement with the U.S. Department of the Treasury's Bureau of the Fiscal
Service , pursuant to which the Bank will provide debit card services to support
the distribution of a segment of the Economic Impact Payments payable by the
Internal Revenue Service under the CARES Act.
The sale of MetaBank's Community Bank division to Central Bank closed on
February 29, 2020 and included all of the Community Bank's deposits, branch
locations, fixed assets, employees, and a portion of the Community Bank's loan
portfolio. The final deposit and loan balances included in the transaction
totaled $290.5 million and $268.6 million , respectively. The remaining Community
Bank loans, which totaled $896.2 million at March 31, 2020 , have been retained
by the Company and are under a servicing agreement with Central Bank .
MetaBank expanded its faster payments platform to include Visa Direct, Visa's
real-time push payments solution. Visa clients can use Visa Direct to enable
businesses and payment service providers to make payments, disbursements and
remittances rapidly, conveniently and cost-effectively, to more than a billion
eligible debit and prepaid cards worldwide. As a leading issuer of payments
services, this addition of Visa Direct builds on MetaBank's faster payments
platform that also includes ACH origination, wire transfers and more.
Financial Highlights
The Company recorded net income of $52.3 million , or $1.45 per diluted share,
for the three months ended March 31, 2020 , comparing favorably to net income of
$32.1 million , or $0.81 per diluted share, that was recorded for the fiscal 2019
second quarter. Total revenue for the fiscal 2020 second quarter was $188.3
million , compared to $176.4 million for the same quarter in fiscal 2019, an
increase of 7%.
During the fiscal 2020 second quarter, the Company recognized net interest
income of $67.7 million , net interest margin ("NIM") of 4.78% and net interest
margin, tax-equivalent ("NIM, TE") of 4.82%. The Company's average gross loans
and leases increased by $486.0 million , or 13%, while average
noninterest-bearing deposits increased by $245.9 million , or 8%, when compared
to the same period in fiscal 2019. Average deposits from the payments divisions
increased nearly 11% to $3.31 billion when compared to the same period in fiscal
2019. Overall, the Company's cost of funds averaged 0.83% during the fiscal 2020
second quarter, compared to 1.17% during the prior year period.
During the fiscal 2020 second quarter, the Company recognized a $19.3 million
gain on divestiture of the Community Bank division, partially offset by one-time
expenses related to the transaction of $1.0 million resulting in a pre-tax net
gain from the transaction of $18.3 million , or $0.51 per share.
Noninterest income for the three months ended March 31, 2020 was $120.5 million ,
compared to $105.0 million for the same period of the prior year. This increase
was primarily attributable to the gain on divestiture. For the three months
ended March 31, 2020 , noninterest expense was $91.7 million . The decrease in
noninterest expense over the prior year fiscal second quarter was driven by
decreases in compensation and benefits expense, impairment expense and
intangible amortization expense.
The Company's nonperforming assets at March 31, 2020 , were $39.4 million ,
representing 0.67% of total assets, compared to $56.5 million , or 0.91% of total
assets at September 30, 2019 . The decrease in nonperforming assets was primarily
driven by the disposal of foreclosed and repossessed assets during the fiscal
2020 first quarter.
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During the quarter ended March 31, 2020 , the Company repurchased 2,592,381 of
its shares, at a weighted average price of $31.78 , under its share repurchase
program, which is authorized through December 31, 2022 . The Company suspended
repurchase activity under its share repurchase program in March. The Company had
34,607,962 shares outstanding at March 31, 2020 .
2020 Tax Season Update
For the 2020 tax season, MetaBank originated$1.33 billion in refund advance loans compared to$1.49 billion during the 2019 tax season. Additionally, the Company expects to process approximately 2.1 million in refund transfers through its tax services division for the 2020 tax season, compared to the over 2.4 million in refund transfers processed during the prior year's tax season. These decreases can primarily be attributed to the exit of non-strategic partners for the 2020 tax season. During the second quarter of fiscal 2020, total tax services product revenue, inclusive of interest income, was$64.8 million , a decrease of 11% compared to the second quarter of fiscal 2019. The Company recorded$19.6 million in loan loss provision expense related to$1.26 billion in tax services loans originated during the fiscal second quarter of 2020. The Company recorded$22.5 million in loan loss provision expense related to$1.43 billion in tax service loans originated during the fiscal second quarter of 2019.
Tax services product income, net of losses and direct product expenses, decreased 12% when comparing the fiscal 2020 second quarter to the same period of the prior fiscal year.
FINANCIAL CONDITION AtMarch 31, 2020 , the Company's total assets decreased by$339.0 million to$5.84 billion compared toSeptember 30, 2019 , primarily due to decreases in loans held for sale and investment securities, while partially being offset by an increase in total loans and leases. Total cash and cash equivalents was$108.7 million atMarch 31, 2020 , an decrease of 14%, from$126.5 million atSeptember 30, 2019 . The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and the FRB. AtMarch 31, 2020 , the Company did not have any federal funds sold. The total investment portfolio decreased$96.8 million , or 7%, to$1.31 billion atMarch 31, 2020 , compared to$1.41 billion atSeptember 30, 2019 , as maturities, sales, and principal pay downs exceeded purchases. The Company's portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, 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 atMarch 31, 2020 were issued by aU.S. Government agency or instrumentality. Of the total MBS atMarch 31, 2020 ,$355.1 million , at fair value, were classified as available for sale, and$6.8 million , at cost, were classified as held to maturity. Of the total investment securities atMarch 31, 2020 ,$840.5 million , at fair value, were classified as available for sale and$108.1 million , at cost, were classified as held to maturity. During the six-months endedMarch 31, 2020 , the Company purchased$40.7 million of investment securities. Loans held for sale atMarch 31, 2020 totaled$13.6 million , decreasing from$148.8 million atSeptember 30, 2019 . This decrease was primarily driven by the sale of held for sale loans resulting in proceeds of$160.3 million during the fiscal 2020 first quarter, which was primarily comprised of$111.7 million of consumer credit product loans sold. The Company's portfolio of gross loans and leases decreased by$40.6 million , or 1%, to$3.61 billion atMarch 31, 2020 , from$3.65 billion atSeptember 30, 2019 . The decrease was primarily driven by the sale of community banking loans, partially offset by an increase in national lending loans and leases. See Note 3 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. 56
-------------------------------------------------------------------------------- Table of Contents National Lending loans and leases increased$265.0 million , or 11% to$2.71 billion atMarch 31, 2020 compared toSeptember 30, 2019 . Within the National Lending portfolios, commercial finance loans and leases increased$110.1 million , tax services loans increased$93.7 million , and warehouse finance portfolio increased$70.9 million , while the consumer finance portfolio decreased$9.8 million atMarch 31, 2020 compared toSeptember 30, 2019 . The seasonality of the Company's tax services business led to the increase in tax services loans atMarch 31, 2020 compared toSeptember 30, 2019 .
Community banking loans decreased
Through the Bank, the Company owns stock in the FHLB due to the Bank's membership and participation in this banking system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company's investment in such stock decreased$1.0 million , or 3%, to$29.9 million atMarch 31, 2020 , from$30.9 million atSeptember 30, 2019 . The decrease in FHLB stock directly correlates with lower overnight borrowings balances from the FHLB atMarch 31, 2020 compared toSeptember 30, 2019 . Total end-of-period deposits decreased$374.6 million , or 9%, atMarch 31, 2020 to$3.96 billion as compared toSeptember 30, 2019 , primarily due to decreases of$748.2 million in wholesale deposits,$83.8 million in certificates of deposit,$39.6 million in money market deposits,$33.3 million in interest-bearing checking deposits and$12.2 million in savings deposits, partially offset by an increase of$542.5 million in noninterest-bearing deposits. The decrease in interest-bearing deposits, certificate of deposits, money market deposits and savings deposits was related to the sale of$290.5 million of deposits included in the sale of theCommunity Bank division. See Note 4 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. The average balance of total deposits and interest-bearing liabilities was$5.39 billion for the six-months endedMarch 31, 2020 , compared to$5.49 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the six-months endedMarch 31, 2020 increased by$245.7 million , or 9%, to$2.96 billion compared to the same period in the prior year. The Company's total borrowings increased$66.5 million , or 8%, from$861.9 million atSeptember 30, 2019 to$928.4 million atMarch 31, 2020 , primarily due to an increase in short-term borrowings. The Company's short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base, primarily related to payroll processing timing with a higher volume of short-term borrowings on Monday and Tuesday, which are typically paid down throughout the week. This predictable fluctuation may be augmented near a month-end by a prefunding of certain programs. The Company also has an available no-fee line of credit with JP Morgan of$25.0 million with no funds advanced atMarch 31, 2020 . AtMarch 31, 2020 , the Company's stockholders' equity totaled$805.1 million , a decrease of$38.9 million , from$844.0 million atSeptember 30, 2019 . 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. AtMarch 31, 2020 , the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution. See "Liquidity and Capital Resources" for further information. 57 -------------------------------------------------------------------------------- Table of Contents Payments Noninterest-bearing Checking Deposits The Company may hold negative balances associated with cardholder programs in the payments divisions that are included within noninterest-bearing deposits on the Company's consolidated statement of financial condition. Negative balances can relate to any of the following payments functions: -Prefundings: The Company deploys funds to consumer 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 prepaid cards in an amount less than the face value as a form of revenue sharing with partners. These discounts are netted at a pooled partner level using ASC 210-20. -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 atMarch 31, 2020 andSeptember 30, 2019 : (Dollars in Thousands) March 31, 2020 September 30, 2019 Noninterest-bearing deposits$ 3,635,979 $ 3,157,946 Prefunding (545,858) (624,307) Discount funding (175,829) (164,560) DDA overdrafts (13,808) (11,069)
Noninterest-bearing checking, net
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. The Company believes that the level of allowance for loan and lease losses atMarch 31, 2020 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See "Allowance for Loan and Lease Losses" below. 58 -------------------------------------------------------------------------------- Table of Contents 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, 2020 September 30, 2019 Nonperforming loans and leases Nonaccruing loans and leases: Term lending $ 12,280 $ 12,146 Factoring 466 1,669 Lease financing 693 308 SBA/USDA 2,585 255 Commercial finance 16,024 14,378 Total National Lending 16,024 14,378 Consumer one-to-four family real estate and other 49 44 Agricultural real estate and operating 1,769 - Total Community Banking 1,818 44 Total 17,842 14,422 Accruing loans and leases delinquent 90 days or more: Held for sale loans - 964 Term lending 4,068 2,241 Lease financing 1,344 1,530 Insurance premium finance 3,109 3,807 SBA/USDA 851 - Commercial finance 9,372 7,578 Consumer credit products 440 239 Other consumer finance 905 1,078 Consumer finance 1,345 1,317 Tax services - 2,240 Total National Lending 10,717 11,135 Commercial real estate and operating 259 - Agricultural real estate and operating 2,646 - Total Community Banking 2,905 - Total 13,622 11,135 Total nonperforming loans and leases 31,464 26,521 Other assets Nonperforming operating leases 706 457 Foreclosed and repossessed assets: Commercial finance 7,249 1,372 Agricultural real estate and operating - 28,122 Total 7,249 29,494 Total other assets 7,955 29,951 Total nonperforming assets $ 39,419 $ 56,472 Total as a percentage of total assets 0.67 % 0.91 % The Company has not experienced significant asset deterioration as ofMarch 31, 2020 , but has made short-term deferments of payments on$9.5 million of loan balances as a result of interagency guidance issued onMarch 22, 2020 encouraging companies to work with customers impacted by COVID-19. Short term payment deferral modifications of$267.9 million and$71.9 million in other COVID-19 related modifications were completed by the Company throughMay 4, 2020 . 59
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At
During the fiscal 2020 first quarter, the Company disposed of assets related to a previously disclosedCommunity Bank agricultural relationship that were held in other real estate owned ("OREO"), which represented 46 basis points of nonperforming assets as ofSeptember 30, 2019 . Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as "substandard," "doubtful" or "loss," with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank's determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management's review of its loans, leases, and other assets, atMarch 31, 2020 , the Company had classified$53.2 million of its assets as substandard,$0.5 million as doubtful and none as loss. AtSeptember 30, 2019 , the Company classified$40.6 million of its assets as substandard,$0.5 million as doubtful and none as loss. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan and lease losses based on management's evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors, in order to determine the amount of risk the Company believes exists within that segment. The Bank's average loss rates over the past three years were low relative to industry averages for such years. The Bank does not believe it is likely that these low loss conditions will continue indefinitely. AtMarch 31, 2020 , the Company had established an allowance for loan and lease losses totaling$65.4 million , compared to$29.1 million atSeptember 30, 2019 . The increase in the Company's allowance for loan and lease losses was driven primarily by increases in the allowance of$21.3 million in tax service loans,$11.3 million in commercial finance, and$5.2 million in the community banking portfolio. Of the combined increase in the commercial finance and the community bank portfolios,$15.8 million was due to additional allowance associated with the emerging COVID-19 pandemic. 60 -------------------------------------------------------------------------------- Table of Contents The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases.
As of the Period Ended
March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019
Commercial finance 1.28 % 0.80 % 0.76 % 0.67 % 0.55 %
Consumer finance 1.74 % 2.22 % 2.30 % 2.22 % 2.08 %
Tax services 22.22 % 1.62 % - % 63.19 % 28.42 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
National Lending 1.92 % 0.90 % 0.86 % 1.44 % 1.77 %
Community Banking 1.49 % 0.68 % 0.68 % 0.70 % 0.74 %
Total loans and leases 1.81 % 0.84 % 0.80 % 1.20 % 1.42 %
Management closely monitors economic developments both regionally and
nationwide, and considers these factors when assessing the appropriateness of
its allowance for loan and lease losses. The Company assessed each of its loan
and lease portfolios during the fiscal second quarter and increased its
allowance for loan and lease losses as a percentage of total loans and leases in
the commercial finance and community bank portfolios as a result of the emerging
COVID-19 pandemic. Management believes that given the structure of the credit
protections put in place for the consumer and warehouse finance lending lines,
the coverage ratio for those loan portfolios was adequate as of March 31, 2020 .
The reduction in consumer finance was largely driven by lower trending
charge-off rates on student loans mainly serving students in the medical
community. Tax services coverage rates were driven only by typical seasonal
activity and are not expected to be materially impacted by COVID-19 as the tax
lending season is substantially complete. The Company expects to continue to
diligently monitor the allowance for loan and lease losses and adjust as
necessary in future periods to maintain an appropriate and supportable level.
Management believes that, based on a detailed review of the loan and lease
portfolio, historic loan and lease losses, current economic conditions, the size
of the loan and lease portfolio and other factors, the level of the allowance
for loan and lease losses at March 31, 2020 reflected an appropriate allowance
against probable incurred losses from the lending portfolio. Although the
Company maintains its allowance for loan and lease losses at a level it
considers to be appropriate, investors and others are cautioned that there can
be no assurance that future losses will not exceed estimated amounts, or that
additional provisions for loan and lease losses will not be required in future
periods. In addition, the Company's determination of the allowance for loan and
lease losses is subject to review by the OCC, which can require the
establishment of additional general or specific allowances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the allowance for loan and lease losses, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company's critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2019 . There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal year 2020.
RESULTS OF OPERATIONS
General. The Company recorded net income of$52.3 million , or$1.45 per diluted share, for the three months endedMarch 31, 2020 , compared to net income of$32.1 million , or$0.81 per diluted share, for the three months endedMarch 31, 2019 . Total revenue for the fiscal 2020 second quarter was$188.3 million , compared to$176.4 million for the same quarter in fiscal 2019, an increase of 7%. The increase in net income was primarily due to an increase in noninterest income along with a decrease in noninterest expense. 61 -------------------------------------------------------------------------------- Table of Contents The Company recorded net income of$73.4 million , or$2.00 per diluted share, for the six months endedMarch 31, 2020 , compared to$47.5 million , or$1.20 per diluted share, for the same period in fiscal year 2019. Total revenue for the six months endedMarch 31, 2020 was$290.4 million , compared to$274.4 million for the same period of the prior year, an increase of$16.0 million , or 6%. Net interest income for the fiscal 2020 second quarter decreased by$3.6 million , or 5%, to$67.7 million from$71.4 million for the same quarter in fiscal 2019. The decrease was driven primarily by a decrease in investment security balances along with lower yields realized on the loan and lease portfolios, partially offset by a reduction in total interest expense. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months endedMarch 31, 2020 increased to 74%, from 65% for the three months endedMarch 31, 2019 , while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 23% from 30% over that same period.
For the six months ended
Net interest margin was 4.78% in the fiscal 2020 second quarter, a decrease of 28 basis points from 5.06% in the fiscal 2019 second quarter. NIM,TE was 4.82% in the fiscal 2020 second quarter, a decrease of 36 basis points from 5.18% in the fiscal 2019 second quarter. The decreases in NIM and NIM, TE in the fiscal 2020 second quarter, compared to the same period of the prior year, were primarily driven by a lower interest rate environment. The net effect of purchase accounting accretion contributed three basis points to NIM for the fiscal 2020 second quarter as compared to 18 basis points for the same period of the prior year. For the six months endedMarch 31, 2020 , NIM was 4.86%, increasing two basis points from 4.84% during the comparable prior year period. NIM, TE for the six months endedMarch 31, 2020 was 4.90%, a decrease of eight basis points for the same period of the prior year. The overall reported tax equivalent yield ("TEY") on average earning assets decreased by 74 basis points to 5.64% when comparing the fiscal 2020 second quarter to the same period of the prior fiscal year. The fiscal 2020 second quarter TEY on the securities portfolio decreased by 68 basis points to 2.68% compared to the same period of the prior year TEY of 3.36%. The decrease TEY on average earning assets and the securities portfolio was primarily due to a lower interest rate environment during the current period compared to the prior year period. The Company's average interest-earning assets for the fiscal 2020 second quarter decreased by$17.5 million to$5.70 billion , from the comparable quarter in 2019. The decrease was primarily attributable to a decrease in total investment securities of$419.2 million , as the Company continued to utilize sales of securities and cash flow from its amortizing securities portfolio to fund loan and lease growth, partially offset by growth in the Company's average loan and lease portfolio of$486.0 million . Of the$486.0 million increase in the average loan and lease portfolio,$587.1 million was related to an increase in National Lending loans, partially offset by a$101.2 million decreasein Community Banking loans. The Company's average balance of total deposits and interest-bearing liabilities was$5.64 billion for the three months endedMarch 31, 2020 , compared to$5.86 billion for the same period in the prior year, representing a decrease of 4%. This decrease was primarily due to decreases in average wholesale deposits of$807.0 million and average time deposits of$63.4 million , partially offset by increases in average balances of total borrowings of$368.3 million , average noninterest-bearing deposits of$245.9 million , average interest-bearing checking of$33.5 million , and average money market deposits of$10.5 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 0.83% during the fiscal 2020 second quarter, compared to 1.17% for the fiscal 2019 second quarter. This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits. The Company's overall cost of deposits was 0.66% in the fiscal 2020 second quarter, compared to 1.06% in the same quarter of 2019. 62 -------------------------------------------------------------------------------- Table of Contents The following tables present, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.
Three Months Ended
2020 2019
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1) Interest-earning assets: Cash & fed funds sold$ 196,754 $ 739 1.51 %$ 281,069 $ 1,914 2.76 % Mortgage-backed securities 358,103 2,493 2.80 % 374,096 2,861 3.10 % Tax exempt investment securities 454,177 2,132 2.39 % 926,156 6,138 3.40 % Asset-backed securities 304,674 2,271 3.00 % 285,783 2,677 3.80 % Other investment securities 192,379 1,275 2.67 % 142,452 1,034 2.95 % Total investments 1,309,333 8,171 2.68 % 1,728,487 12,710 3.36 % Total commercial finance 2,020,358 41,643 8.29 % 1,649,973 41,954 10.31 % Total consumer finance 264,307 5,386 8.20 % 327,441 7,289 9.03 % Total tax services 516,491 6,351 4.95 % 369,331 8,204 9.01 % Total warehouse finance 314,474 4,785 6.12 % 181,781 2,789 6.22 % National Lending loans and leases 3,115,630 58,165 7.51 % 2,528,526 60,236 9.66 % Community Banking loans 1,080,142 12,328 4.59 % 1,181,294 13,434 4.61 % Total loans and leases 4,195,772 70,493 6.76 % 3,709,820 73,670 8.05 % Total interest-earning assets 5,701,859$ 79,403 5.64 % 5,719,376$ 88,294 6.38 % Noninterest-earning assets 909,040 1,068,318 Total assets$ 6,610,899 $ 6,787,694 Interest-bearing liabilities: Interest-bearing checking$ 182,107 $ 105 0.23 %$ 148,640 $ 78 0.21 % Savings 46,592 6 0.05 % 56,048 9 0.07 % Money markets 68,421 153 0.90 % 57,932 92 0.64 % Time deposits 84,940 427 2.02 % 148,384 715 1.95 % Wholesale deposits 1,476,085 7,551 2.06 % 2,283,049 13,846 2.46 % Total interest-bearing deposits 1,858,145 8,242 1.78 % 2,694,053 14,740 2.22 % Overnight fed funds purchased 372,596 1,307 1.41 % 103,600 637 2.49 % FHLB advances 110,000 670 2.45 % - - - % Subordinated debentures 73,698 1,158 6.32 % 73,542 1,162 6.41 % Other borrowings 28,714 289 4.04 % 39,610 405 4.14 % Total borrowings 585,008 3,424 2.35 % 216,752 2,204 4.12 % Total interest-bearing liabilities 2,443,153 11,666 1.92 % 2,910,805 16,944 2.36 % Noninterest-bearing deposits 3,199,148 - - % 2,953,275 - - % Total deposits and interest-bearing liabilities 5,642,301$ 11,666 0.83 % 5,864,080$ 16,944 1.17 % Other noninterest-bearing liabilities 136,759 129,525 Total liabilities 5,779,060 5,993,605 Shareholders' equity 831,839 794,089 Total liabilities and shareholders' equity$ 6,610,899 $ 6,787,694 Net interest income and net interest rate spread including noninterest-bearing deposits$ 67,737 4.81 %$ 71,350 5.21 % Net interest margin 4.78 % 5.06 % Tax-equivalent effect 0.04 % 0.12 % Net interest margin, tax-equivalent(2) 4.82 % 5.18 % (1) Tax rate used to arrive at the TEY for the three months endedMarch 31, 2020 and 2019 was 21%. (2) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 63
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Six Months Ended March 31,
2020 2019
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 147,910 $ 1,151 1.56 % $ 161,931 $ 2,468 3.06 %
Mortgage-backed securities 367,280 4,882 2.66 % 377,730 5,559 2.95 %
Tax exempt investment securities 472,680 4,471 2.39 % 1,083,386 13,941 3.27 %
Asset-backed securities 304,278 4,626 3.04 % 292,184 5,389 3.70 %
Other investment securities 194,960 2,704 2.77 % 126,492 1,745 2.77 %
Total investments 1,339,198 16,683 2.67 % 1,879,792 26,634 3.24 %
Total commercial finance 2,000,325 86,423 8.64 % 1,605,531 81,235 10.15 %
Total consumer finance 267,477 11,176 8.36 % 309,233 13,519 8.77 %
Total tax services 269,115 6,385 4.74 % 188,201 8,206 8.74 %
Total warehouse finance 289,885 8,960 6.18 % 140,349 4,421 6.32 %
National Lending loans and leases 2,826,802 112,944 7.99 % 2,243,314 107,381 9.60 %
Community Banking loans 1,137,423 26,251 4.62 % 1,168,545 26,787 4.60 %
Total loans and leases 3,964,225 139,195 7.02 % 3,411,859 134,168 7.89 %
Total interest-earning assets 5,451,333 $ 157,029 5.80 % 5,453,582 $ 163,270 6.14 %
Noninterest-earning assets 914,034 926,604
Total assets $ 6,365,367 $ 6,380,186
Interest-bearing liabilities:
Interest-bearing checking $ 172,850 $ 259 0.30 % $ 125,508 $ 135 0.22 %
Savings 47,690 16 0.07 % 54,841 19 0.07 %
Money markets 74,507 357 0.96 % 56,090 156 0.56 %
Time deposits 100,014 1,022 2.04 % 177,028 1,597 1.81 %
Wholesale deposits 1,474,444 15,929 2.16 % 1,987,559 23,429 2.36 %
Total interest-bearing deposits 1,869,505 17,583 1.88 % 2,401,026 25,336 2.12 %
Overnight fed funds purchased 337,509 2,757 1.63 % 250,049 3,117 2.50 %
FHLB advances 110,000 1,348 2.45 % - - - %
Subordinated debentures 73,678 2,318 6.29 % 73,523 2,323 6.34 %
Other borrowings 31,165 635 4.08 % 45,209 872 3.87 %
Total borrowings 552,352 7,058 2.56 % 368,781 6,312 3.43 %
Total interest-bearing liabilities 2,421,857 24,641 2.03 % 2,769,806 31,648 2.29 %
Noninterest-bearing deposits 2,964,329 - - % 2,718,661 - - %
Total deposits and interest-bearing
liabilities 5,386,186 $ 24,641 0.91 % 5,488,467 $ 31,648 1.16 %
Other noninterest-bearing liabilities 143,576 118,783
Total liabilities 5,529,762 5,607,250
Shareholders' equity 835,605 772,936
Total liabilities and shareholders'
equity $ 6,365,367 $ 6,380,186
Net interest income and net interest
rate spread including
noninterest-bearing deposits $ 132,388 4.89 % $ 131,622 4.98 %
Net interest margin 4.86 % 4.84 %
Tax-equivalent effect 0.04 % 0.14 %
Net interest margin, tax-equivalent(2) 4.90 % 4.98 %
(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2020
and 2019 was 21%.
(2) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
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Provision for Loan and Lease Losses. The Company recorded a $37.3 million and a
$40.7 million provision for loan and lease losses for the three and six months
ended March 31, 2020 , as compared to a $33.3 million and a $42.4 million
provision for loan and lease losses for the same period of the prior year.
The increase in provision for the quarter ended March 31 . 2020 compared to the
same period of the prior year was primarily due to $15.8 million in additional
allowance for the Company's loan and lease portfolio, specifically for the
commercial finance portfolio and the remaining community bank portfolio,
associated with the emerging COVID-19 pandemic.
Also see Note 6 to the Condensed Consolidated Financial Statements included in this quarterly report.
Noninterest Income. Noninterest income for the fiscal 2020 second quarter increased to$120.5 million from$105.0 million for the same period in the prior fiscal year. This increase was primarily due to a$19.3 million gain on divestiture of theCommunity Bank division during the fiscal 2020 second quarter. See Note 4 to the Condensed Consolidated Financial Statements included in this quarterly report. Increases in other income and rental income, partially offset by decreases in total tax product fee income and payments card and deposit fees, also contributed to the increase when comparing the fiscal 2020 second quarter to the same period of the prior year. Noninterest income for the six months endedMarch 31, 2020 of$158.0 million , increased$15.2 million , or 11%, from$142.8 million in the same period in the prior fiscal year. Noninterest Expense. Noninterest expense decreased 17% to$91.7 million for the fiscal 2020 second quarter, from$110.3 million for the same quarter of fiscal 2019. The decrease in noninterest expense when comparing the fiscal 2020 second quarter to the same period of the prior year was primarily driven by decreases in compensation and benefits expense, impairment expense, and intangible amortization expense, partially offset by increases in operating lease equipment depreciation, other expense and legal and consulting expense. The Company recognized$1.0 million of one-time noninterest expenses related to theCommunity Bank division divestiture during the fiscal second quarter of 2020. These expenses were primarily within legal and consulting expense and other expense.
Noninterest expense for the six months ended
Income Tax. The Company recorded income tax expense of$5.6 million , or an effective tax rate of 9.48%, for the fiscal 2020 second quarter, compared to an income tax benefit of$0.4 million , representing an effective tax rate of (1.20)%, for the fiscal 2019 second quarter. The recorded income tax expense during the current quarter was due to an increase in net income before tax, as well as less investment tax credits recognized ratably when compared to the prior year quarter. The Company originated$17.6 million in solar leases during the fiscal 2020 second quarter, and did not originate any solar leases during the fiscal 2019 second quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria. Insignificant income tax impacts are expected related to COVID-19.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, derived principally through its payments divisions, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. AtMarch 31, 2020 , the Company had commitments to originate and purchase loans and unused lines of credit totaling$985.5 million . The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. 65 -------------------------------------------------------------------------------- Table of Contents Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by theFederal Reserve and the OCC. The Basel III Capital Rules became effective for us and the Bank onJanuary 1, 2015 , subject to phase-in periods for certain of their components and other provisions. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). AtMarch 31, 2020 , both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements. The Company and the Bank took the accumulated other comprehensive income ("AOCI") opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis. Minimum to be Minimum to be Adequately Well Capitalized Capitalized Under Under Prompt Prompt Corrective Corrective Action At March 31, 2020 Company Bank Action Provisions Provisions Tier 1 leverage capital ratio 7.28 % 8.52 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 10.27 12.39 4.50 6.50 Tier 1 capital ratio 10.63 12.44 6.00 8.00 Total capital ratio 13.61 13.69 8.00 10.00 66
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The following table provides certain non-GAAP financial measures used to compute
certain of the ratios included in the table above, as well as a reconciliation
of such non-GAAP financial measures to the most directly comparable financial
measure in accordance with GAAP:
Standardized
Approach(1)
(Dollars in Thousands) March 31, 2020
Total stockholders' equity $ 805,074
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities 303,625
LESS: Certain other intangible assets 44,909
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
11,589
LESS: Net unrealized gains on available-for-sale securities 2,337
LESS: Noncontrolling interest 3,762
Common Equity Tier 1 Capital (1) 438,852
Long-term borrowings and other instruments qualifying as Tier 1 13,661
Tier 1 minority interest not included in common equity tier 1 capital
2,036
Total Tier 1 Capital 454,549
Allowance for loan and lease losses 53,580
Subordinated debentures (net of issuance costs) 73,724
Total Capital 581,853
(1) Capital ratios were determined using the Basel III capital rules that became
effective on January 1, 2015 . Basel III revised the definition of capital,
increased minimum capital ratios, and introduced a minimum common equity tier 1
capital ratio; those changes are being fully phased in through the end of 2021.
The following table provides a reconciliation of tangible common equity and
tangible common equity excluding AOCI, each of which is used in calculating
tangible book value data, to Total Stockholders' Equity. Each of tangible common
equity and tangible common equity excluding AOCI is a non-GAAP financial measure
that is commonly used within the banking industry.
(Dollars in Thousands) March 31, 2020
Total Stockholders' Equity $ 805,074
LESS: Goodwill 309,505
LESS: Intangible assets 46,766
Tangible common equity 448,803
LESS: AOCI 1,654
Tangible common equity excluding AOCI 447,149
Since January 1, 2016 , the Company and the Bank have been required to maintain a
capital conservation buffer above the minimum risk-based capital requirements in
order to avoid certain limitations on capital distributions, stock repurchases
and discretionary bonus payments to executive officers. The capital conservation
buffer is exclusively composed of Common Equity Tier 1 capital, and it applies
to each of the three risk-based capital ratios but not the leverage ratio. The
required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based
capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively.
Based on current and expected continued profitability and subject to continued
access to capital markets, we believe that the Company and the Bank will
continue to meet the capital conservation buffer of 2.5% in addition to required
minimum capital ratios.
CONTRACTUAL OBLIGATIONS
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Contractual Obligations" in the Company's Annual Report on
Form 10-K for its fiscal year ended September 30, 2019 for a summary of our
contractual obligations as of September 30, 2019 . There were no material changes
outside the ordinary course of our business in contractual obligations from
September 30, 2019 through March 31, 2020 .
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OFF-BALANCE SHEET FINANCING ARRANGEMENTS
For discussion of the Company's off-balance sheet financing arrangements at
March 31, 2020 , see Note 15 to our consolidated financial statements included in
Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q.
Depending on the extent to which the commitments or contingencies described in
Note 15 occur, the effect on the Company's capital and net income could be
significant.
REGULATION AND SUPERVISION
The following information is intended to update, and should be read in conjunction with, the information contained under the caption "Regulation and Supervision" in the Company's Annual Report on Form 10-K. Updates Related to COVID-19 In response to the COVID-19 pandemic, the CARES Act was signed into law byPresident Trump onMarch 27, 2020 . The CARES Act provides for approximately$2.2 trillion in emergency economic relief measures including, among other things, loan programs for small and mid-sized businesses and other economic relief for impacted businesses and industries, including financial institutions. Many of the CARES Act's programs are dependent upon the direct involvement ofU.S. financial institutions, such as the Bank, and will be implemented through rules and guidance adopted by federal departments and agencies, including theU.S. Department of Treasury , theFederal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. The following description of certain provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the Company and the Bank is qualified in its entirety by reference to the full text of CARES Act and the statutes, regulations, and policies described herein. Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company. Many of the requirements called for in the CARES Act and related regulations and supervisory guidance will be implemented over time and most will be subject to implementing regulations over the course of the coming weeks. The Company will continue to assess the impact of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic.
The CARES Act
Paycheck Protection Program ("PPP"). The CARES Act amends the SBA loan program,
which the Bank participates in, to create a guaranteed, unsecured loan program,
the PPP, to fund operational costs of eligible businesses, organizations and
self-employed persons during COVID-19. Nearly $660 billion in funds have been
authorized for the PPP, which the SBA will use to guarantee 100% of the amounts
loaned under the PPP by lenders to eligible small businesses, nonprofits,
veterans organizations, and tribal businesses.
Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The
CARES Act permits financial institutions to suspend requirements under GAAP for
loan modifications to borrowers affected by COVID-19 that would otherwise be
characterized as TDRs and suspend any determination related thereto if (i) the
loan modification is made between March 1, 2020 and the earlier of December 31,
2020 or 60 days after the end of the coronavirus emergency declaration and (ii)
the applicable loan was not more than 30 days past due as of December 31, 2019 .
In addition, federal bank regulatory authorities have issued guidance to
encourage financial institutions to make loan modifications for borrowers
affected by COVID-19 and have assured financial institutions that they will
neither receive supervisory criticism for such prudent loan modifications, nor
be required by examiners to automatically categorize COVID-19-related loan
modifications as TDRs. See Note 19. Subsequent Events for further information
about the COVID-19-related loan modifications completed by the company.
Temporary Community Bank Leverage Ratio Relief. Pursuant to the CARES Act,
federal bank regulatory authorities are required to adopt an interim rule,
effective until the earlier of the termination of the coronavirus emergency
declaration and
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Debt Guarantees, Account Insurance Increase, and Temporary Lending Limit Relief.
The CARES Act also authorized several key initiatives directly applicable to
federal bank regulatory authorities, including (i) the establishment of a
program by the FDIC to guarantee the debt obligations of solvent insured
depository institutions and their affiliates (including their holding companies)
through December 31, 2020 , (ii) an increase by the FDIC and the National Credit
Union Association to the insurance coverage on any noninterest-bearing
transaction accounts through December 31, 2020 , and (iii) the waiver by the OCC
of single borrower lending limits for national banks and federal savings
associations until the earlier of the termination date of the coronavirus
national emergency declaration and December 31, 2020 .
Federal Reserve Programs and Initiatives. The CARES Act encourages the Federal
Reserve , in coordination with the Secretary of the Treasury , to establish or
implement various programs to help midsize businesses, nonprofits, and
municipalities, including (i) a Midsize Business/Nonprofit Organization Program
to provide financing to banks and other lenders to make direct loans to eligible
businesses and nonprofit organizations with between 500 and 10,000 employees and
(ii) the Municipal Liquidity Facility, provide liquidity to the financial system
that supports states and municipalities. On April 9, 2020 , the Federal Reserve
announced and solicited comments regarding the Main Street Lending Program,
which would implement certain of these recommendations. Further action regarding
the Main Street Lending Program is expected soon.
Separately and in response to COVID-19, the Federal Reserve's Federal Open
Market Committee (the "FOMC") has set the federal funds target rate - i.e., the
interest rate at which depository institutions such as the Bank lend reserve
balances to other depository institutions overnight on an uncollateralized basis
- to an historic low. On March 16, 2020 , the FOMC set the federal funds target
rate at 0-0.25%. Consistent with Federal Reserve policy, the Federal Reserve has
committed to the use of overnight reverse repurchase agreements as a
supplementary policy tool, as necessary, to help control the federal funds rate
and keep it in the target range set by the FOMC .
In addition, the Federal Reserve has expanded the size and scope of three
existing programs to mitigate the economic impact of the COVID-19 outbreak: (i)
the Primary Market Corporate Credit Facility; (ii) the Secondary Market
Corporate Credit Facility; and (iii) the Term Asset-Backed Securities Loan
Facility. The Federal Reserve has also established two new program facilities -
the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding
Facility - to broaden its support for the flow of credit to households and
businesses during COVID-19.
Temporary Regulatory Capital Relief related to Impact of CECL. Concurrent with
enactment of the CARES Act, federal bank regulatory authorities issued an
interim final rule to provide banking organizations that are required to
implement CECL before the end of 2020 the option to delay the estimated impact
on regulatory capital by up to two years, with a three-year transition period to
phase out the cumulative benefit to regulatory capital provided during the
two-year delay.
Temporary Bank Secrecy Act ("BSA") Reporting Relief. The U.S. Department of the
Treasury's Financial Crimes Enforcement Network ("FinCEN") has provided targeted
relief from certain BSA reporting requirements and have provided updated
guidance to financial institutions on complying with such requirements during
COVID-19. Specifically, FinCEN has (i) granted targeted relief to financial
institutions participating in the PPP, stating that PPP loans to existing
customers will not require re-verification under applicable BSA requirements,
unless re-verification is otherwise required under the financial institution's
risk-based BSA compliance program, (ii) acknowledged that there may be
"reasonable delays in compliance" due to COVID-19, and (iii) temporarily
suspended implementation of its February 2020 ruling, which would have entailed
significant changes to currency transaction reporting filing requirements for
transactions involving sole proprietorships and entities operating under a
"doing business as" or other assumed name.
Separately, the OCC issued OCC Bulletin 2020-34 in support of the FinCEN
Statement and encouraged all national banks to follow a risk-based approach to
their BSA compliance programs. The OCC also confirmed that it will consider the
actions taken by a national bank to protect and assist employees, customers and
others in response to the COVID-19 pandemic when evaluating the bank's BSA
compliance program, including any reasonable delays in BSA report filings,
beneficial ownership verification or re-verification, and other risk management
processes.
69-------------------------------------------------------------------------------- Table of Contents Updates Related to the Conversions of the Company and the Bank As a result of theApril 1, 2020 conversions, the Company is a bank holding company that has elected to be a financial holding company, which is supervised and examined by the FRB and the Bank is a national bank supervised and examined by the OCC. Except as otherwise noted, the Company's and the Bank's post-conversion regulatory obligations under the National Bank Act ("NBA") and under the BHC Act and Regulation Y, respectively, are substantially consistent with the pre-conversion regulatory obligations of the Bank and the Company under HOLA and Regulation LL. Regulation and Supervision. As a BHC that has elected to become a FHC, the Company is supervised by theFederal Reserve and may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by theFederal Reserve in consultation with the Secretary of theTreasury ) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by theFederal Reserve ). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments. As a result of the conversion of the Bank to a national bank charter, the Bank derives its lending and investment powers from the National Bank Act ("NBA") and the OCC's implementing regulations promulgated thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC's regulatory requirements and limitations. In general, the Bank's legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the "combined general limit"). AtMarch 31, 2020 , the Bank was in compliance with the combined general limit.
No Qualified Thrift Lender Test. As a national bank, the Bank is no longer required to be a qualified thrift lender (a "QTL") or satisfy any element of the QTL test applicable to federal savings associations.
Limitations on Dividends and Other Capital Distributions. The NBA and related federal regulations govern the permissibility of dividends and capital distributions by a national bank. As a national bank, the Bank's board of directors may declare and pay dividends of as much of the undivided profits as the directors judge to be expedient, subject to the certain key restrictions, including: •unless approved by the OCC, the Bank may not declare a dividend if the total amount of all dividends (common and preferred), including the proposed dividend, declared in any current year exceeds the total of the Bank's net income of the current year to date, combined with the retained net income of current year minus one and current year minus two, less the sum of transfers required by the OCC (if any) and transfers required to be made to a fund for the retirement of any preferred stock (if any);
•the Bank may not declare a dividend if the Bank has sustained losses at any time that equal or exceed its undivided profits (i.e., retained earnings); and
•the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be "undercapitalized" as defined in the OCC's Prompt Corrective Action regulations.
Acquisitions. Federal law prohibits a BHC directly or indirectly, from: (a) acquiring control (as defined under the BHC Act) of another depository institution (or a holding company parent) without priorFederal Reserve approval; or (b) through merger, consolidation or purchase of assets, acquiring another depository institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without priorFederal Reserve approval. In evaluating applications by bank holding companies to acquire insured depository institutions, theFederal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors. 70
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Table of Contents OnApril 1, 2020 , theFederal Reserve's final rule for determining whether a company has control over a bank or other company for purposes of the BHC Act and the control presumptions promulgated under Regulation Y (the "Control Rule") became effective. The Control Rule provides specific guidance in place of theFederal Reserve's prior facts-and-circumstances approach to control evaluations under the BHC Act and Regulation Y.
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