PATHWARD FINANCIAL, INC. This section should be read in conjunction with the following parts of this Form 10-K: Part I, Item 1 "Business," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part II, Item 8 "Financial Statements and Supplementary Data."
GENERAL
The Company, a registered bank holding company, is aDelaware 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. EXECUTIVE SUMMARY
Business Development Highlights for the 2021 Fiscal Fourth Quarter and Full Fiscal Year 2021
•Named the
•Recognized a net unrealized gain of$4.1 million on a prior investment in MoneyLion Inc. ("MoneyLion") following the completion of its de-SPACing process and listing on theNew York Stock Exchange onSeptember 22, 2021 .
•Expanded our renewable energy financing, originating
•Announced a new share repurchase program and repurchased 234,297 shares during the 2021 fiscal fourth quarter, at an average price of$51.18 , reflecting the momentum of the business and confidence in the Company's strategy and growth trajectory. An additional 1,252,145 shares were repurchased subsequent toSeptember 30, 2021 throughNovember 18, 2021 . •BradleyC. Hanson , President and Chief Executive Officer of the Company retired from his positions atMeta Financial and MetaBank. He will remain on the Company's Board until the next annual stockholders' meeting, expected to take place inFebruary 2022 . He also will serve as a Strategic Advisor to Meta on industry and partner relations until the end of 2022. The Board appointedBrett L. Pharr as Chief Executive Officer andAnthony M. Sharett as President ofMeta Financial Group and MetaBank effectiveOctober 1, 2021 . Financial Highlights for the 2021 Fiscal Fourth Quarter Total revenue for the fourth quarter was$120.2 million , an increase of$14.9 million compared to the same quarter in fiscal 2020, primarily driven by higher net interest income, payments fee income and$4.1 million in other income related to the MoneyLion valuation. Net interest income for the fourth quarter was$70.7 million , an increase of$6.2 million compared to$64.5 million in the fourth quarter last year. Net interest margin ("NIM") improved to 4.35% for the fourth quarter from 3.77% during the same period of last year, chiefly due to the decrease of cash associated with the Company's participation in the EIP program, as well as an increase in commercial and warehouse finance loans and leases. Total gross loans and leases atSeptember 30, 2021 increased$293.7 million , to$3.61 billion , or 9%, compared toSeptember 30, 2020 and increased$112.6 million , or 3%, when compared toJune 30, 2021 . The increase was primarily driven by growth in commercial finance, and consumer finance loans partially offset by a decrease in community bank loans, which was driven by a loan sale of$75.1 million during the quarter. Subsequent Events Management has evaluated and identified subsequent events that occurred afterSeptember 30, 2021 . See Note 25. Subsequent Events for details on these events. 60 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION AtSeptember 30, 2021 , the Company's total assets increased by$598.6 million to$6.69 billion compared toSeptember 30, 2020 , primarily due to an increase of$596.8 million in investment securities available for sale. Total cash and cash equivalents was$314.0 million atSeptember 30, 2021 , decreasing from$427.4 million atSeptember 30, 2020 , primarily resulting from the withdraw 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 ofDes Moines and the FRB. AtSeptember 30, 2021 , the Company did not have any federal funds sold. The total investment portfolio increased$560.9 million , or 41%, to$1.92 billion atSeptember 30, 2021 , compared to$1.36 billion atSeptember 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 atSeptember 30, 2021 were issued by aU.S. Government agency or instrumentality. Of the total MBS atSeptember 30, 2021 ,$1.02 billion , at fair value, were classified as available for sale, and$3.7 million , at cost, were classified as held to maturity. Of the total investment securities atSeptember 30, 2021 ,$847.9 million , at fair value, were classified as available for sale and$52.9 million , at cost, were classified as held to maturity. During the fiscal year endedSeptember 30, 2021 , the Company purchased$1.04 billion of investment securities. Loans held for sale atSeptember 30, 2021 totaled$56.2 million , decreasing from$183.6 million atSeptember 30, 2020 . This decrease was primarily driven by a portion of the retainedCommunity Bank loan portfolio transferred to loans held for sale atSeptember 30, 2020 compared to none atSeptember 30, 2021 . The Company's total loans and leases increased$293.7 million , or 9%, to$3.61 billion atSeptember 30, 2021 , from$3.31 billion atSeptember 30, 2020 . The increase was primarily driven by growth in the commercial finance, tax services, and warehouse finance portfolios partially offset by the continued decrease in community banking loan balances. See Note 5 to the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K. Commercial finance loans increased$417.5 million , or 18% to$2.73 billion atSeptember 30, 2021 compared toSeptember 30, 2020 . Consumer finance loans, tax services loans and warehouse finance loans increased$28.7 million ,$7.3 million , and$126.6 million atSeptember 30, 2021 , respectively, compared toSeptember 30, 2020 . Community banking loans decreased$286.4 million , or 59%, atSeptember 30, 2021 compared toSeptember 30, 2020 , primarily attributable to loan portfolio sales along with continued principal payments and payoffs. As ofSeptember 30, 2021 , the Company had no community banking loans classified as held for sale. See Note 3 and Note 5 to the "Notes to Consolidated Financial Statements," which are included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 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 theFederal 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 atSeptember 30, 2021 from$27.1 million atSeptember 30, 2020 , resulting from the purchase of FHLB membership stock. Total end-of-period deposits increased 11% to$5.51 billion atSeptember 30, 2021 , compared to$4.98 billion atSeptember 30, 2020 . The increase in end-of-period deposits was primarily driven by an increase in noninterest-bearing deposits of$661.6 million , partially offset by a decrease in wholesale deposits of$269.1 million . The increase in noninterest-bearing deposits was driven by government stimulus-related dollars loaded on various partner cards. As ofSeptember 30, 2021 , EIP program card balances outstanding totaled$1.64 billion , of which only$69.8 million was on Meta's balance sheet with the remainder being held by other banks. The Company's total borrowings decreased$5.4 million , or 5%, from$98.2 million atSeptember 30, 2020 to$92.8 million atSeptember 30, 2021 . See Note 13 to the "Notes to Consolidated Financial Statements," which are included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 61
-------------------------------------------------------------------------------- Table of Contents AtSeptember 30, 2021 , the Company's stockholders' equity totaled$871.9 million , an increase of$24.6 million , from$847.3 million atSeptember 30, 2020 . The increase was primarily attributable to growth in retained earnings and an increase in additional paid-in capital.The Company and Bank remained above the federal regulatory minimum capital requirements atSeptember 30, 2021 , continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See Note 18 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. RESULTS OF OPERATIONS The Company's results of operations are dependent on net interest income, provision for credit losses, noninterest income, noninterest expense and income tax expense. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan and lease demand and deposit flows. Notwithstanding that a significant amount of the Company's deposits, primarily those attributable to the payments division, pay relatively low rates of interest or none at all, the Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The provision for credit losses is the adjustment to the allowance for credit losses balance for the applicable period. The allowance for credit losses 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's noninterest income is derived primarily from tax product fees, prepaid cards, credit products, deposit and ATM fees attributable to the payments division and fees charged on bank loans, leases and transaction accounts. Noninterest income is also derived from rental income, net gains on the sale of securities, net gains on the sale of loans and leases, as well as the Company's holdings of bank-owned life insurance. This income is offset by noninterest expenses, such as compensation and occupancy expenses associated with additional personnel and office locations, as well as card processing expenses and tax product expenses attributable to the payments division. Noninterest expense is also impacted by acquisition-related expenses, operating lease equipment depreciation expense, occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses. 62 -------------------------------------------------------------------------------- Table of Contents Average Balances, Interest Rates and Yields The following table presents, for the periods indicated, the 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 yields on interest-bearing assets and NIM. Nonaccruing loans and leases have been included in the table as loans or leases carrying a zero yield. Fiscal Year Ended September 30, 2021 2020 2019 Average Interest Average Interest Average Interest Outstanding Earned / Yield / Outstanding Earned / Yield / Outstanding Earned / Yield / (Dollars in Thousands) Balance Paid Rate (1) Balance Paid Rate (1) Balance Paid Rate (1) Interest-earning assets: Cash and fed funds sold$ 1,919,760 $ 3,709 0.19 %$ 1,236,027 $ 2,824 0.23 %$ 128,507 $ 3,494 2.72 % Mortgage-backed securities 728,884 12,155 1.67 % 367,869 9,028 2.45 % 393,322 11,390 2.90 % Tax exempt investment securities 281,573 4,004 1.80 % 434,262 7,477 2.18 % 852,381 20,742 3.08 % Asset-backed securities 388,458 5,340 1.37 % 319,258 7,636 2.39 % 299,777 10,705 3.57 % Other investment securities 239,283 4,566 1.91 % 198,924 4,748 2.39 % 164,451 4,870 2.96 % Total investments 1,638,198 26,065 1.66 % 1,320,313 28,889 2.34 % 1,709,931 47,707 3.11 % Commercial finance 2,549,335 188,855 7.41 % 2,100,464 169,189 8.05 % 1,717,869 169,941 9.89 % Consumer finance 248,757 19,940 8.02 % 254,293 19,808 7.79 % 341,176 29,965 8.78 % Tax services 214,835 7,321 3.41 % 148,650 6,390 4.30 % 110,503 8,193 7.41 % Warehouse finance 330,224 21,262 6.44 % 292,952 17,919 6.12 % 188,483 11,826 6.27 % Community banking 375,258 18,702 4.98 % 975,618 47,822 4.90 % 1,180,594 54,603 4.63 % Total loans and leases 3,718,409 256,080 6.89 % 3,771,977 261,128 6.92 % 3,538,625 274,528 7.76 % Total interest-earning assets 7,276,367$ 285,854 3.94 % 6,328,317$ 292,841 4.66 % 5,377,063$ 325,729 6.16 % Noninterest-earning assets 849,141 881,314 875,124 Total assets$ 8,125,508 $ 7,209,631 $ 6,252,187 Interest-bearing liabilities: Interest-bearing checking$ 254,236 $ - - %$ 189,704 $ 259 0.14 %$ 136,069 $ 356 0.26 % Savings 81,619 16 0.02 % 50,888 18 0.03 % 53,434 38 0.07 % Money markets 58,656 204 0.35 % 57,573 422 0.73 % 60,719 419 0.69 % Time deposits 13,081 139 1.06 % 61,837 1,226 1.98 % 149,220 2,830 1.90 % Wholesale deposits 150,213 1,234
0.82 % 1,081,935 20,691 1.91 % 1,772,092 43,005 2.43 %
Total interest-bearing deposits 557,805 1,593 0.29 % 1,441,937 22,616 1.57 % 2,171,534 46,648 2.15 %
Overnight fed funds purchased 6 - 0.25 % 183,438 2,804 1.53 % 300,203 7,484 2.49 %
FHLB Advances - - - % 106,093 2,638 2.49 % 42,712 1,037 2.43 %
Subordinated debentures 73,886 4,507 6.10 % 73,718 4,618 6.26 % 73,561 4,647 6.32 %
Other borrowings 21,549 763 3.54 % 28,696 1,127 3.93 % 44,097 1,706 3.87 %
Total borrowings 95,441 5,270 5.52 % 391,945 11,187 2.85 % 460,573 14,874 3.23 %
Total interest-bearing
liabilities 653,246 6,863 1.05 % 1,833,882 33,803 1.84 % 2,632,107 61,522 2.34 %
Noninterest-bearing deposits 6,440,830 - - % 4,396,132 - - % 2,685,502 - - %
Total deposits and
interest-bearing liabilities 7,094,115 $ 6,863 0.10 % 6,230,014 $ 33,803 0.54 % 5,317,609 $ 61,522 1.16 %
Other noninterest-bearing
liabilities 189,841 143,772 132,901
Total liabilities 7,283,956 6,373,786 5,450,510
Shareholders' equity 841,552 835,845 801,677
Total liabilities and
shareholders' equity $ 8,125,508 $ 7,209,631 $ 6,252,187
Net interest income and net
interest rate spread including
noninterest-bearing deposits $ 278,992 3.84 % $ 259,038 4.12 % $ 264,207 5.00 %
Net interest margin 3.83 % 4.09 % 4.91 %
Tax equivalent effect 0.01 % 0.03 % 0.11 %
Net interest margin, tax
equivalent (2) 3.84 % 4.12 % 5.02 %
(1) Tax rate used to arrive at the TEY for the fiscal years ended September 30,
2021 , 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. Management of 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
believe the presentation of this non-GAAP financial measure may be useful for
peer comparison purposes.
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Rate / Volume Analysis
The following table presents, for the periods presented, the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. The table
distinguishes between the change related to higher outstanding balances and the
change due to the levels and volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume that cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate.
Fiscal Year Ended September 30,
2021 vs. 2020 2020 vs. 2019
Increase / Increase / Total Increase / Increase / Total
(Decrease) (Decrease) Increase / (Decrease) (Decrease) Increase /
(Dollars in Thousands) Due to Volume Due to Rate (Decrease) Due to Volume Due to Rate (Decrease)
Interest-earning assets:
Cash and fed funds sold $ 1,408 $ (523) $ 885 $ 5,181 $ (5,851) $ (670)
Mortgage-backed securities 6,711 (3,584) 3,127 (704) (1,658) (2,362)
Tax-exempt investment securities (2,323) (1,150) (3,473) (8,310) (4,955) (13,265) Asset-backed securities 1,423 (3,720) (2,297) 659 (3,726) (3,069) Other investment securities 865 (1,045) (180) 919 (1,041) (122) Total investments 6,845 (9,668) (2,823) (8,999) (9,819) (18,818) Commercial finance 34,013 (14,347) 19,666 34,015 (34,767) (752) Consumer finance (441) 573 132 (7,033) (3,124) (10,157) Tax services 2,440 (1,509) 931 2,292 (4,095) (1,803) Warehouse finance 2,362 981 3,343 6,396 (303) 6,093 Community banking (29,872) 752 (29,120) (9,902) 3,121 (6,781) Total loans and leases (3,784) (1,264) (5,048) 17,364 (30,764) (13,400) Total interest-earning assets$ 4,469 $ (11,455) $ (6,986) $ 13,546 $ (46,434) $ 32,888 Interest-bearing liabilities: Interest-bearing checking $ 66$ (324) $ (258) $ 110$ (207) $ (97) Savings 8 (9) (1) (2) (18) (20) Money markets 8 (226) (218) (22) 25 3 Time deposits (684) (404) (1,088) (1,727) 123 (1,604) Wholesale deposits (11,698) (7,759) (19,457) (14,450) (7,864) (22,314) Total interest-bearing deposits (9,025) (11,997) (21,022) (13,327) (10,705) (24,032) Overnight fed funds purchased (1,527) (1,278) (2,805) (2,346) (2,334) (4,680) FHLB Advances (1,319) (1,319) (2,638) 1,575 26 1,601 Subordinated debentures 10 (122) (112) 10 (39) (29) Other borrowings (261) (103) (364) (604) 25 (579) Total borrowings (12,000) 6,082 (5,918) (2,072) (1,615) (3,687)
Total interest-bearing liabilities
Net effect on net interest income
$ 19,954 $ 28,945 $ (34,114) $ 5,169
Comparison of Operating Results for the Fiscal Years Ended
General
The Company recorded net income of$141.7 million , or$4.38 per diluted share, for the fiscal year endedSeptember 30, 2021 , compared to$104.7 million , or$2.94 per diluted share, for the fiscal year endedSeptember 30, 2020 , an increase of$37.0 million . Total revenue for fiscal 2021 was$549.9 million , compared to$498.8 million for fiscal 2020, an increase of 10%. The increases in net income and revenue was primarily due to an increase in noninterest income and a decrease in provision for credit losses, partially offset by an increase in non-interest expense. 64
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Net Interest Income Net interest income for fiscal 2021 increased by$20.0 million , or 8%, to$279.0 million from$259.0 million for the same period of the prior year. The increase in net interest income was mainly attributable to the continued optimization of our earning asset and liability mix, which included a decrease in interest expense of 80% to$6.9 million for fiscal 2021, from$33.8 million for the same period of the prior year. The decrease in interest expense was primarily driven by a significant increase in noninterest-bearing deposits, which lessened the Company's need to rely on wholesale deposits during fiscal 2021. NIM was 3.83% for fiscal 2021, a decrease of 26 basis points from 4.09% in fiscal 2020. The decrease in NIM in fiscal 2021, compared to the same period of the prior year was primarily attributable to the increase in noninterest-bearing deposit balances related to government stimulus-related dollars. This increase in deposit balances also led to excess cash balances held at theFederal Reserve during fiscal 2021, which yielded approximately 10 basis points in interest income, and increased the quarterly average of interest-earning assets compared to previous periods. This increase of lower-yielding cash balances resulted in a drag to the overall yield on total interest-earning assets during the current period. The overall reported tax equivalent yield ("TEY") on average interest-earning assets decreased by 72 basis points to 3.94% when comparing fiscal 2021 to fiscal 2020. The reduction was driven primarily by an increase in low-yielding cash held at theFederal Reserve , along with an overall lower rate environment. The yield on the commercial finance portfolio decreased by 64 basis points and the tax services portfolio decreased by 89 basis points while the yield on the warehouse finance portfolio increased by 32 basis points. The fiscal 2021 TEY on the securities portfolio decreased by 68 basis points to 1.66% as compared to the same period of the prior year. The Company's average interest-earning assets for fiscal 2021 increased$948.1 million , or 15%, to$7.28 billion , from$6.33 billion during fiscal 2020. The increase was primarily attributable to increases in average cash balances of$683.7 million and total average investment securities of$317.9 million , partially offset by a decrease in average loan and lease balances of$53.6 million . The increase in average cash balances was due to an increase in noninterest-bearing deposit balances related to government stimulus-related dollars. The decrease in the Company's average loan and lease balances was driven by a reduction$600.4 million in community banking loans partially offset by increases of$448.9 million ,$66.2 million , and$37.3 million in commercial finance, tax services, and warehouse finance loans, respectively. The Company's average balance of total deposits and interest-bearing liabilities increased$864.1 million , or 14%, to$7.09 billion during fiscal 2021, from$6.23 billion during fiscal 2020. This increase was primarily due to increases in average noninterest-bearing deposits of$2.04 billion , partially offset by a decrease in average wholesale deposits of$931.7 million and a decrease in the average balance of total borrowings of$296.5 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 0.10% during fiscal 2021, compared to 0.54% during fiscal 2020. The cost of deposits was 0.01% during fiscal 2021, compared to 0.12% during fiscal 2020. This decrease was primarily due to a decrease in the average balance of overnight borrowings and FHLB advances as well as an increase in the average balance of the Company's noninterest-bearing deposits. The Company believes that its growing, lower-cost deposit base gives it a distinct and significant competitive advantage, and even more so if interest rates rise, because the Company anticipates that its cost of funds will likely remain relatively low, increasing less than at many other banks. Provision for Credit Losses EffectiveOctober 1, 2020 , the Company adopted the CECL accounting standard, which required a day one entry to increase the allowance for credit losses in the amount of$12.8 million . The entry did not have a direct impact to the provision for credit losses at the time of adoption. During fiscal 2021, the Company recorded$49.8 million in provision for credit losses, compared to$64.8 million in fiscal 2020. The decrease in provision was largely attributable to the build in reserves during the prior year stemming from the COVID-19 pandemic. Also see Note 5 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Noninterest Income Noninterest income increased by$31.1 million , or 13%, to$270.9 million for fiscal 2021 from$239.8 million for fiscal 2020. The increase in noninterest income was primarily driven by tax advance fee income and payments fee income. The payments fee income was aided by an increase in activity related to government stimulus programs. 65 -------------------------------------------------------------------------------- Table of Contents Noninterest Expense Noninterest expense increased by$24.6 million , or 8%, to$343.7 million for fiscal 2021 from$319.1 million for fiscal 2020. This increase in noninterest expense was primarily driven by an increase in compensation expense of$14.8 million and in legal and consulting expense of$10.5 million . CEO transition expenses of$1.3 million related to accelerated vesting of CEO shares and associated professional expenses also contributed to the year-over-year change. Income Tax Expense The Company recorded an income tax expense of$10.7 million for fiscal 2021, resulting in an effective tax rate of 6.8%, compared to an income tax expense of$5.7 million and an effective tax rate of 4.9%, in fiscal 2020. The increase in recorded income tax expense during the period was primarily due to an increase in taxable income. The Company originated$101.1 million in solar leases for the 2021 fiscal year, compared to$77.8 million during the 2020 fiscal 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.
Comparison of Operating Results for the Fiscal Years Ended
A comparison of the 2020 results to the 2019 results and other 2019 information
not included herein can be found in the Company's Annual Report on Form
10-K: Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" filed
Nonperforming Assets and Allowance for Credit Losses AtSeptember 30, 2021 , nonperforming assets, consisting of nonaccruing loans and leases, accruing loans and leases delinquent 90 days or more, foreclosed real estate, repossessed property, and nonperforming operating leases, totaled$61.8 million , or 0.92% of total assets, compared to$48.0 million , or 0.79% of total assets, atSeptember 30, 2020 . The increase in NPAs was primarily attributable to one$14.9 million relationship in the community bank portfolio along with increases in tax services and commercial finance loans, partially offset by a reduction of foreclosed and repossessed assets. As ofSeptember 30, 2021 , the Company had nonaccruing loans and leases totaling$34.2 million and foreclosed and repossessed assets of approximately$2.1 million . The Company maintains an allowance for credit losses because it is probable that some loans and leases may not be repaid in full. AtSeptember 30, 2021 , the Company had an allowance for credit losses of$68.3 million as compared to$56.2 million atSeptember 30, 2020 . The increase was driven by a$18.3 million increase in the commercial finance portfolio and a$3.7 million increase in the consumer lending portfolio. These increases were driven by the year-over-year loan growth and the adoption of the CECL accounting standard, which required a day one entry to increase the allowance for credit losses in the amount of$12.8 million effectiveOctober 1, 2020 . The increases noted above were partially offset by a$10.0 million reduction within the retained community banking portfolio, as the balance in community bank loans declined.
The following table presents the Company's allowance for credit losses as a percentage of its total loans and leases.
As of the Period Ended
September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 October 1, 2020(1) September 30, 2020
Commercial finance 1.77 % 1.73 % 1.77 % 1.88 % 1.85 % 1.30 %
Consumer finance 2.91 % 3.80 % 4.70 % 4.39 % 4.31 % 1.64 %
Tax services 0.02 % 58.99 % 12.90 % 1.53 % 0.06 % 0.06 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
Community banking 6.16 % 4.36 % 4.03 % 4.01 % 3.37 % 4.59 %
Total loans and leases 1.89 % 2.61 % 2.71 % 2.10 % 2.08 % 1.70 %
(1) Represents the Company's allowance coverage ratio upon the adoption of the
Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and
allowance balances plus the CECL allowance adjustment..
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Allowance for credit losses as a percentage of the total loan and lease
portfolio was 1.89% at September 30, 2021 , compared to 1.70% at September 30,
2020 . This increase was driven primarily by the adoption of the CECL accounting
standard noted above. The CECL methodology requires loss estimates for the
remaining estimated life of the assets to be measured using historical loss
data, adjustments for current conditions, and adjustments for reasonable and
supportable forecasts of future economic conditions, which led to the increase
in the ACL as of the October 1, 2020 adoption date.
During fiscal year 2021, the Company had net charge-offs of $50.6 million , of
which $33.3 million were related to the tax services portfolio. During fiscal
year 2020, the Company had net charge-offs of $37.7 million , of which $22.0
million were related to the tax services portfolio. The charge-offs within the
tax services portfolio were fully reserved for.
Management closely monitors economic developments both regionally and
nationwide, and considers these factors when assessing the appropriateness of
its allowance for credit losses. The Company continued to assess each of its
loan and lease portfolios during the fiscal fourth quarter and increased its
allowance for credit losses as a percentage of total loans and leases in the
community bank and commercial finance portfolios primarily as a result of the
ongoing COVID-19 pandemic, as noted above. 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 now complete. The Company
expects to continue to diligently monitor the allowance for credit 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 credit losses at September 30, 2021 reflected an appropriate allowance
against inherent credit losses from the lending portfolio. Although the Company
maintains its allowance for credit 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 credit losses is
subject to review by the OCC, which can require the establishment of additional
general or specific allowances.
Management's periodic review of the allowance for credit losses is based on
various subjective and objective factors, including the Company's past loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions. While management may
allocate portions of the allowance for specifically identified problem loan and
lease situations, the majority of the allowance is based on both subjective and
objective factors related to the overall loan and lease portfolio and is
available for any loan and lease charge-offs that may occur. As stated
previously, there can be no assurance future losses will not exceed estimated
amounts, or that additional provisions for credit losses will not be required in
future periods. In addition, the Bank is subject to review by the OCC, which has
the authority to require management to make changes to the allowance for credit
losses, and the Company is subject to similar review by the Federal Reserve . In
determining the allowance for credit losses, the Company specifically identifies
loans and leases it considers as having potential collectability problems. The
Company believes these loans and leases possess weaknesses that merit additional
analysis in establishing the allowance for credit losses. All other loans and
leases are evaluated by applying estimated loss ratios to various pools of loans
and leases. The Company then analyzes other applicable qualitative factors (such
as economic conditions) in determining the aggregate amount of the allowance
needed.
At September 30, 2021 , $8.9 million of the allowance for credit losses was
allocated to loans and leases individually evaluated for credit losses. See Note
5 of the "Notes to Consolidated Financial Statements," which is included in Part
II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report
on Form 10-K. At September 30, 2020 , $5.1 million of the allowance for credit
losses was allocated to impaired loans and leases.
The Company maintains an internal loan and lease review and classification
process which involves multiple officers of the Company and is designed to
assess the general quality of credit underwriting and to promote early
identification of potential problem loans and leases. All loan officers are
charged with the responsibility of risk rating all loans and leases in their
portfolios and updating the ratings, positively or negatively, on an ongoing
basis as conditions warrant.
67-------------------------------------------------------------------------------- Table of Contents The level of potential problem loans and leases is another predominant factor in determining the relative level of risk in the loan and lease portfolio and in determining the appropriate level of the allowance for credit losses. Potential problem loans and leases are generally defined by management to include loans and leases rated as substandard by management that are not considered nonperforming (i.e., non-accrual loans and leases and accruing troubled debt restructurings), but there are circumstances that create doubt as to the ability of the borrower to comply with repayment terms. The decision of management to include performing loans and leases in potential problem loans and leases does not necessarily mean that the Company expects losses to occur, but that management recognizes a higher degree of risk associated with these loans and leases. The loans and leases that have been reported as potential problem loans and leases are predominantly commercial loans and leases covering a diverse range of businesses and real estate property types. The Company revised its credit administration policies and reviewed its loan portfolio to better align with OCC guidance for national banks, a process that began during the quarter endingJune 30, 2021 and was completed as ofSeptember 30, 2021 . These credit policy revisions had an impact on the loan and lease risk ratings, resulting in downgrades of certain credits in several categories. The Company's loan and collateral management practices have proven effective in managing losses during previous economic cycles; and while management expects this process will result in setting a new baseline for portfolio metrics going forward, management does not believe it indicates a deterioration in expected performance of the portfolio. AtSeptember 30, 2021 , potential problem loans and leases totaled$276.7 million compared to$67.9 million atSeptember 30, 2020 .
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, derived principally through its payments division, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, to maintain liquidity, and to meet operating expenses.
The Bank is required by regulation to maintain sufficient liquidity to assure its safe and sound operation. In the opinion of management, the Bank is in compliance with this requirement.
Liquidity management is both a daily and long-term function of the Company's management strategy. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) the projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency or instrumentality obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and other wholesale funding sources. The Company is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company's liquidity or its ability to borrow additional funds. The primary investing activities of the Company are the origination of loans and leases and the purchase of securities. During the fiscal years endedSeptember 30, 2021 , 2020 and 2019, the Company originated loans and leases totaling$12.62 billion ,$9.79 billion and$10.97 billion , respectively. Purchases of loans and leases totaled$311.3 million ,$151.4 million , and$278.1 million during the fiscal years endedSeptember 30, 2021 , 2020 and 2019. During the fiscal years endedSeptember 30, 2021 , 2020 and 2019, the Company purchased MBS and other securities in the amount of$1.04 billion ,$297.8 million and$653.2 million , respectively. Of these purchases, there were no securities designated as held to maturity in fiscal 2021, 2020 and 2019. AtSeptember 30, 2021 , the Company had unfunded loan and lease commitments of$1.22 billion . See Note 19 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Certificates of deposit scheduled to mature in one year or less atSeptember 30, 2021 totaled$31.1 million , of which$23.3 million were wholesale time deposits and$7.8 million were non-wholesale time deposits. Management believes that loan repayment and other sources of funds will be adequate to meet the Company's foreseeable short- and long-term liquidity needs. 68 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the Company's significant contractual obligations atSeptember 30, 2021 . Less Than 1 More Than 5 (Dollars in Thousands) Total Year 1 to 3 Years 3 to 5 Years Years Time deposits$ 9,091 $ 7,839 $ 1,252 $ - $ - Wholesale time deposits 23,409 23,310 99 - - Long-term debt 92,834 398 4,795 73,980 13,661 Operating leases 45,071 4,687 8,332 7,126 24,926 Total$ 170,405 $ 36,234 $ 14,478 $ 81,106 $ 38,587 DuringJuly 2001 , the Company's unconsolidated trust subsidiary, First Midwest Financial Capital Trust I, sold$10.3 million in floating-rate cumulative preferred securities. Proceeds from the sale were used to purchase trust preferred securities of the Company, which mature in 2031, and are redeemable at any time after five years. The capital securities are required to be redeemed onJuly 25, 2031 ; however, the Company has the option to redeem them earlier.
In 2016, the Company completed a public offering of
Through the Crestmark Acquisition, consummated in the fourth quarter of fiscal 2018, the Company acquired$3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the company. The subordinated debentures bear interest at LIBOR plus 3.00%, have a stated maturity of 30 years and are redeemable by the Company at par, with regulatory approval. See Note 10 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The Company and the Bank met regulatory requirements for classification as well-capitalized institutions atSeptember 30, 2021 . Based on current and expected continued profitability and subject to continued access to capital markets, management believes that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. See Note 18 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The payment of dividends and repurchase of shares have the effect of reducing stockholders' equity. Prior to authorizing such transactions, the Board of Directors considers the effect the dividend or repurchase of shares would have on liquidity and regulatory capital ratios. No assurance can be given that our regulators will consider our liquidity level, or our capital level, though substantially in excess of current rules pursuant to which the Company and the Bank are considered "well-capitalized," to be sufficiently high in the future.
Impact of New Accounting Standards
See Note 1 to the Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Critical Accounting 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
the policies described below as Critical Accounting Estimates. 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.
Allowance for Credit Losses
The Company's allowance for credit losses methodology estimates expected credit
losses over the life of each financial asset as of the balance sheet date.
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For the loan and lease portfolio, the Company measures credit loss on
individually evaluated loans based on the fair value of the collateral less
estimated selling costs if collateral dependent or based on the present value of
expected future cash flows discounted at the loan or lease initial effective
interest rate if not collateral dependent. The majority of the Company's loans
and leases subject to individual evaluation are considered collateral dependent.
Only loans and leases that are on nonaccrual status or are designated as a TDR
are subject to individual evaluation. All other loans and leases are evaluated
collectively for credit loss by pooling loans and leases based on similar risk
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 and forecasted economic
conditions, 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 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 and
forecasted economic conditions, and measurement date credit characteristics
including delinquency.
Investment debt securities held to maturity include implicit and explicit
guarantees by government agencies and have an expected zero risk of loss,
therefore no provision for credit loss for debt securities held to maturity has
been included in the Company's Consolidated Statement of Operations. Investment
debt securities available for sale are recorded at fair value and are assessed
quarterly for credit loss. Any such credit loss is recorded in the Company's
Provision for Credit Loss on the Company's Consolidated Statement of Operations.
Non-credit related losses are recorded in Other Comprehensive Income in the
Company's Consolidated Statement of Condition.
Although management believes the levels of the allowance for credit losses at
September 30, 2021 and September 30, 2020 are adequate to absorb expected credit
losses in the financial assets evaluated, a decline in local economic conditions
or other factors could result in increasing losses.
Goodwill and Identifiable Intangible Assets
The Company accounts for business combinations under the acquisition method of
accounting in accordance with ASC 805, Business Combinations. Under the
acquisition method, the Company records assets acquired, including identifiable
intangible assets, liabilities assumed, and any non-controlling interest in the
acquired business at their fair values as of the acquisition date. Any
acquisition-related transaction costs are expensed in the period
incurred. Results of operations of the acquired entity are included in the
Consolidated Statements of Operations from the date of acquisition. Any
measurement-period adjustments are recorded in the period the adjustment is
identified.
The excess of consideration paid over the fair value of the net assets acquired
is recorded as goodwill. Determining the fair value of assets acquired,
including identifiable intangible assets, liabilities assumed, and any
noncontrolling interest often requires the use of significant estimates and
assumptions. This may involve estimates based on third-party valuations, such as
appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques such as estimates of attrition, inflation, asset
growth rates, discount rates, multiples of earnings or other relevant
factors. In addition, the determination of the useful lives over which an
intangible asset will be amortized is subjective. See Note 10. Goodwill and
Intangibles to the Consolidated Financial Statements for further information.
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