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; our ability to remediate the
material weakness in our internal controls over financial reporting and
otherwise maintain effective internal controls over financial reporting; the
expected impact of the ongoing COVID-19 pandemic and related governmental
actions on our business, industry, and the capital markets; customer retention;
expectations regarding the Company's and the Bank's ability to meet minimum
capital ratios and capital conservation buffers; loan and other product demand;
expectations concerning acquisitions and divestitures; new products and
services; credit quality; the level of net charge-offs and the adequacy of the
allowance for credit losses; technology; and management and other 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: successfully
transitioning and 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, including the impact on financial markets from geopolitical
conflicts such as the military conflict between Russia and Ukraine ; successfully
completing our announced rebranding and our ability to achieve brand recognition
equal to or greater than we currently enjoy; changes in tax laws; the strength
of the United States' economy, and the local economies in which the Company
operates; changes in trade, monetary, and fiscal policies and laws, including
actual changes in interest rates and the Fed funds rate; inflation, market, and
monetary fluctuations; the timely and efficient development of new products and
services offered by the Company or its strategic partners, as well as risks
(including reputational and litigation) attendant thereto, and the perceived
overall value and acceptance of these products and services by users; the Bank's
ability to maintain its Durbin Amendment exemption; the risks of dealing with or
utilizing third parties, including, in connection with the Company's tax refund
advance business; the risk of reduced volume of refund advance loans as a result
of reduced customer demand for or usage of Meta's strategic partners' refund
advance products; our relationship with, and any actions which may be initiated
by our regulators; changes in financial services laws and regulations, including
laws and regulations relating to the tax refund industry and the insurance
premium finance industry and recent and potential changes in response to the
ongoing COVID-19 pandemic; technological changes, including, but not limited to,
the security of our electronic systems and information; the impact of
acquisitions and divestitures; litigation risk; the growth of the Company's
business, as well as expenses related thereto; continued maintenance by MetaBank
of its status as a well-capitalized institution; changes in consumer spending
and saving habits; losses from fraudulent or illegal activity; technological
risks and developments, and cyber threats, attacks or events; and the success of
the Company at maintaining its high quality asset level and managing and
collecting assets of borrowers in default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place
undue reliance on these forward-looking statements. The forward-looking
statements included in this Quarterly Report on Form 10-Q speak only as of the
date hereof, and the Company does not undertake any obligation to update,
revise, or clarify these forward-looking statements whether as a result of new
information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in its entirety by the cautionary statements contained
or referred to in this section. Additional discussions of factors affecting the
Company's business and prospects are reflected under the caption "Risk Factors"
and in other sections of the Company's Annual Report on Form 10-K for the
Company's fiscal year ended September 30, 2021 , 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.
36-------------------------------------------------------------------------------- Table of Contents 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.
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, 2022 , compared toSeptember 30, 2021 , and the consolidated results of operations for the three and six months endedMarch 31, 2022 and 2021. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year endedSeptember 30, 2021 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, 2021 .
EXECUTIVE SUMMARY
Tax Season
For the 2022 tax season, the Bank originated$1.83 billion in refund advance loans compared to$1.79 billion during the 2021 tax season. The Company expects taxpayer advance volumes to return to more normalized levels in the 2023 tax season, absent further stimulus or additional changes to tax credit payments. During the second quarter of fiscal 2022, total tax services product revenue was$68.3 million , an increase of 2% compared to the second quarter of fiscal 2021. Both total tax services product fee income and total tax services product expense were approximately flat compared to the prior year period. Net interest income on tax services loans increased$1.5 million during the second quarter of fiscal 2022 compared to the second quarter last year. Total tax services product income, net of losses and direct product expenses, increased 6% to$34.4 million from$32.6 million , when comparing the first six months of fiscal 2022 to the same period of the prior fiscal year.
Business Development Highlights for the 2022 Fiscal Second Quarter
•OnMarch 29, 2022 , the Company announced it is changing its name to Pathward Financial, Inc.™, and its bank subsidiary, MetaBank®, N.A., will be changing its name to Pathward™, N.A. Certain changes will be made immediately, with a full transition to Pathward expected by the end of this calendar year, including the launch of a new brand identity and website. The Company will continue to serve its customers under existing brand names during the transition. The Company recognized$2.8 million of pre-tax expenses related to rebranding efforts during the second quarter of fiscal 2022. The Company continues to estimate total rebranding expenses will range between$15 million and$20 million . •OnApril 27, 2022 , Meta published its second annual ESG report. In addition to detailing the Company's community impact program and its diversity, equity, and inclusion initiatives, it contains enhanced quantitative reporting, which will be used to measure progress.
Financial Highlights for the 2022 Fiscal Second Quarter
•Total revenue for the second quarter was$193.6 million , an increase of$6.2 million , or 3%, compared to the same quarter in fiscal 2021, primarily driven by an increase in interest income, partially offset by a reduction in noninterest income.
•Net interest income for the second quarter was
•Net interest margin ("NIM") increased to 4.80% for the second quarter from
3.07% during the same period of last year. The prior year was impacted by excess
cash associated with the Company's participation in the U.S. Treasury
Department's Economic Impact Program ("EIP").
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•Total gross loans and leases at March 31, 2022 increased $78.1 million , to
$3.73 billion , or 2%, compared to March 31, 2021 and increased $43.5 million , or
1%, when compared to December 31, 2021 . The increase compared to the prior year
quarter was driven by growth across our loan portfolios, partially offset by the
sale of all remaining community banking loans during the fiscal 2022 first
quarter.
•The Company originated $1.3 million in aggregate principal of renewable energy
loan financing for the second quarter of fiscal 2022, resulting in $0.3 million
in total net investment tax credits.
•The Company repurchased 736,198 shares, at an average price of $57.01 , in the
second fiscal quarter and has 4,868,177 shares available for repurchase under
the common stock share repurchase program announced during the fourth quarter of
fiscal year 2021.
•On March 24, 2022 , the Company's Board of Directors approved the redemption at
par of $75.0 million of the 5.75% fixed to floating rate note due August 15,
2026 . The redemption date is set for May 15, 2022 .
FINANCIAL CONDITION
AtMarch 31, 2022 , the Company's total assets increased by$196.6 million to$6.89 billion compared toSeptember 30, 2021 , primarily due to an increase of$178.6 million in securities available for sale. Total cash and cash equivalents was$237.7 million atMarch 31, 2022 , decreasing from$314.0 million atSeptember 30, 2021 , primarily resulting from a decrease in excess cash associated with the Company's participation in the EIP in the prior year. Otherwise, the Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and the FRB. AtMarch 31, 2022 , the Company did not have any federal funds sold. The total investment portfolio increased$169.2 million , or 9%, to$2.09 billion atMarch 31, 2022 , compared to$1.92 billion atSeptember 30, 2021 , 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 atMarch 31, 2022 were issued by aU.S. Government agency or instrumentality. During the six months endedMarch 31, 2022 , the Company purchased$470.1 million of investment securities. Loans held for sale atMarch 31, 2022 totaled$31.4 million , decreasing from$56.2 million atSeptember 30, 2021 . This decrease was primarily driven by the balance of SBA/USDA loans held for sale as ofMarch 31, 2022 as compared toSeptember 30, 2021 . The Company's total loans and leases increased$118.3 million , or 3%, to$3.73 billion atMarch 31, 2022 , from$3.61 billion atSeptember 30, 2021 . The increase was primarily driven by growth in the commercial finance, tax services, warehouse finance, and consumer finance portfolios, partially offset by the sales of all remaining community banking loans. See Note 5 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. Commercial finance loans increased$189.3 million , tax services loans increased$75.6 million , consumer finance increased$30.9 million , and warehouse finance increased$21.6 million atMarch 31, 2022 compared toSeptember 30, 2021 . The increase in commercial finance loan balances was largely driven by the term lending category. The seasonality of the Company's tax services business led to the increase in tax services loans atMarch 31, 2022 compared toSeptember 30, 2021 . Community banking loans decreased$199.1 million , or 100%, atMarch 31, 2022 compared toSeptember 30, 2021 , as all remaining community banking loans were sold during the fiscal 2022 first quarter. 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$0.4 million , or 1% to$28.8 million atMarch 31, 2022 from$28.4 million atSeptember 30, 2021 , resulting from the purchase of FHLB membership stock. 38 -------------------------------------------------------------------------------- Table of Contents Total end-of-period deposits increased 6% to$5.83 billion atMarch 31, 2022 , compared toSeptember 30, 2021 , primarily driven by an increase in noninterest-bearing deposits of$592.1 million partially offset by a decrease in interest-bearing checking of$254.4 million . As ofMarch 31, 2022 , the Company managed$1.85 billion of customer deposits at other banks in its capacity as custodian.
The Company's total borrowings decreased
AtMarch 31, 2022 , the Company's stockholders' equity totaled$763.4 million , a decrease of$108.5 million , from$871.9 million atSeptember 30, 2021 . The decrease was primarily attributable to a reduction in accumulated other comprehensive income ("AOCI") and a reduction in retained earnings related to activity from the Company's share repurchase programs.The Company and Bank remained above the federal regulatory minimum capital requirements atMarch 31, 2022 , continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See "Liquidity and Capital Resources" for further information. Payments Noninterest-bearing Checking Deposits The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's Condensed Consolidated Statements of Financial Condition. Negative balances can relate to any of the following payments functions:
-Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20.
-Discount fundings: The Company funds cards in an amount that is estimated to be
less than final breakage values on card programs. Consumers may spend more than
is estimated. These discounts are netted at a pooled partner level using ASC
210-20. The majority of these discount fundings relate to one partner.
-Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow
cardholders traditional DDA overdraft protection services whereby cardholders
can spend a limited amount in excess of their available card balance. When
overdrawn, these accounts are re-classed as loans on the balance sheet within
the Consumer Finance category.
The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet -
Offsetting, for all payments negative deposit balances with the exception of DDA
overdrafts. The following table summarizes the Company's negative deposit
balances within the payments division:
(Dollars in thousands) March 31, 2022 September 30, 2021
Noninterest-bearing deposits$ 6,084,769 $ 5,492,646 Prefunding (428,011) (436,111) Discount funding (36,943) (26,440) DDA overdrafts (9,513) (11,862)
Noninterest-bearing checking, net
RESULTS OF OPERATIONS
General
The Company recorded net income of$49.3 million , or$1.66 per diluted share, for the three months endedMarch 31, 2022 , compared to net income of$59.1 million , or$1.84 per diluted share, for the three months endedMarch 31, 2021 . Total revenue for the fiscal 2022 second quarter was$193.6 million , compared to$187.3 million for the same quarter in fiscal 2021. The decrease in net income was primarily driven by an increase in noninterest expense, an increase in income tax expense, and a decrease in noninterest income, partially offset by an increase in net interest income. The Company recorded net income of$110.6 million , or$3.66 per diluted share, for the six months endedMarch 31, 2022 , compared to$87.1 million , or$2.65 per diluted share, compared to the same period in the prior year. Total revenue for the six months endedMarch 31, 2022 was$351.8 million , compared to$298.8 million for the same period of the prior year. The increase in net income was primarily driven by an increase in net interest income and noninterest income, partially offset by increases in both income tax expense and noninterest expense. 39 -------------------------------------------------------------------------------- Table of Contents Net Interest Income Net interest income for the fiscal 2022 second quarter was$83.8 million , an increase of 13%, from the same quarter in fiscal 2021. The increase was mainly attributable to an improved earning asset mix, together with increased loan balances. For the six months endedMarch 31, 2022 , net interest income was$155.4 million , an increase of 11%, from$139.8 million compared to the same period in the prior year. The second quarter average outstanding balance of loans and leases increased$124.1 million compared to the same quarter of the prior year, primarily due to increases in core loan and lease portfolios, partially offset by the sale of the remaining community bank portfolio. The Company's average interest-earning assets for the second quarter decreased by$2.69 billion to$7.08 billion compared with the same quarter in fiscal 2021, primarily due to a reduction in cash balances as a result of high cash levels during the prior year period related to the Company's participation in government stimulus programs. The decrease in interest-earnings assets was partially offset by growth in total investments and total loans and leases. Fiscal 2022 second quarter NIM increased to 4.80% from 3.07% in the second quarter of last year. The overall reported tax equivalent yield ("TEY") on average earning assets increased by 174 basis points to 4.89% compared to the prior year quarter, primarily driven by a decrease in lower-yielding cash balances. Growth in loan and lease and investment securities balances also contributed to the year-over-year TEY increase. The yield on the loan and lease portfolio was 7.22% compared to 6.74% for the comparable period last year and the TEY on the securities portfolio was 1.83% compared to 1.78% for that same period. For the six months endedMarch 31, 2022 , NIM was 4.70%, an increase of 105 basis points from 3.65% compared to the same period in the prior year. NIM, tax-equivalent for the six months endedMarch 31, 2022 increased to 4.72% from 3.67% in the same period of the prior year. The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2022 second quarter, the same as the prior year quarter. The Company's overall cost of deposits was 0.01% in the fiscal 2022 second quarter, compared to 0.02% in the same quarter last year. The following tables present, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield. 40
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Three Months Ended March 31,
2022 2021
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 and fed funds sold $ 810,857 $ 721 0.36 % $ 4,187,558 $ 1,090 0.11 %
Mortgage-backed securities 1,184,377 5,446 1.86 % 543,256 2,607 1.95 %
Tax exempt investment securities 189,213 903 2.45 % 297,299 1,132 1.96 %
Asset-backed securities 370,671 1,142 1.25 % 389,406 1,290 1.34 %
Other investment securities 282,655 1,425 2.05 % 230,168 1,077 1.90 %
Total investments 2,026,916 8,916 1.83 % 1,460,129 6,106 1.78 %
Commercial finance 2,852,147 48,872 6.95 % 2,471,694 46,299 7.60 %
Consumer finance 331,033 7,892 9.67 % 255,625 6,968 11.06 %
Tax services 594,166 11,599 7.92 % 714,789 6,544 3.71 %
Warehouse finance 467,298 7,177 6.23 % 315,162 4,845 6.23 %
Community banking - - - % 363,285 3,817 4.26 %
Total loans and leases 4,244,644 75,540 7.22 % 4,120,555 68,473 6.74 %
Total interest-earning assets 7,082,417 $ 85,177 4.89 % 9,768,242 $ 75,669 3.15 %
Noninterest-earning assets 814,151 887,610
Total assets $ 7,896,568 $ 10,655,852
Interest-bearing liabilities:
Interest-bearing checking(2) $ 289 $ - 0.32 % $ 275,982 $ - - %
Savings 82,902 6 0.03 % 77,562 4 0.02 %
Money markets 102,473 53 0.21 % 56,352 42 0.30 %
Time deposits 8,682 10 0.49 % 12,820 34 1.07 %
Wholesale deposits 173,493 96 0.22 % 175,777 365 0.84 %
Total interest-bearing deposits 367,839 165 0.18 % 598,493 445 0.30 %
Overnight fed funds purchased 95,700 62 0.26 % - - - %
Subordinated debentures 74,040 1,002 5.49 % 73,864 1,147 6.30 %
Other borrowings 17,874 148 3.35 % 22,377 227 4.12 %
Total borrowings 187,614 1,212 2.62 % 96,241 1,374 5.79 %
Total interest-bearing liabilities 555,453 1,377 1.01 % 694,734 1,819 1.06 %
Noninterest-bearing deposits 6,311,583 - - % 8,967,067 - - %
Total deposits and interest-bearing
liabilities 6,867,036 $ 1,377 0.08 % 9,661,801 $ 1,819 0.08 %
Other noninterest-bearing liabilities 213,982 177,372
Total liabilities 7,081,018 9,839,173
Shareholders' equity 815,550 816,679
Total liabilities and shareholders'
equity $ 7,896,568 $ 10,655,852
Net interest income and net interest
rate spread including
noninterest-bearing deposits $ 83,800 4.81 % $ 73,850 3.08 %
Net interest margin 4.80 % 3.07 %
Tax-equivalent effect 0.01 % 0.01 %
Net interest margin, tax-equivalent(3) 4.81 % 3.08 %
(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2022
and 2021 was 21%.
(2) At March 31, 2021 , $275.7 million of the total balance were interest-bearing
deposits where interest expense was paid by a third party and not by the
Company. On October 1, 2021 , the Company reclassified the balances related to
that program to noninterest bearing checking due to the product moving to
noninterest bearing.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
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Six Months Ended March 31,
2022 2021
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 and fed funds sold $ 701,548 $ 1,280 0.37 % $ 2,485,330 $ 1,932 0.16 %
Mortgage-backed securities 1,094,729 9,310 1.71 % 490,358 4,730 1.93
%
Tax exempt investment securities 198,518 1,723 2.20 % 315,714 2,348 1.89 % Asset-backed securities 379,212 2,295 1.21 % 357,514 2,490 1.40 % Other investment securities 281,232 2,885 2.06 % 226,032 2,186 1.94 % Total investments 1,953,691 16,213 1.71 % 1,389,618 11,754 1.79 % Commercial finance 2,813,348 97,894 6.98 % 2,444,396 91,928 7.54 % Consumer finance 323,724 14,006 8.68 % 247,534 11,716 9.49 % Tax services 310,805 13,073 8.44 % 366,157 6,553 3.59 % Warehouse finance 455,271 14,077 6.20 % 299,510 9,778 6.55 % Community banking 69,707 1,525 4.39 % 447,096 10,153 4.55 % Total loans and leases 3,972,855 140,575 7.10 % 3,804,693 130,128 6.86 % Total interest-earning assets 6,628,094$ 158,068 4.80 % 7,679,641$ 143,814 3.77
%
Noninterest-earning assets 827,143 866,262 Total assets$ 7,455,237 $ 8,545,903 Interest-bearing liabilities: Interest-bearing checking(2)$ 339 $ 1 0.32 %$ 218,743 $ - - % Savings 81,822 11 0.03 % 64,741 6 0.02 % Money markets 88,921 105 0.24 % 54,466 81 0.30 % Time deposits 8,651 25 0.58 % 15,130 91 1.20 % Wholesale deposits 119,855 164 0.28 % 218,925 1,063 1.97 % Total interest-bearing deposits 299,588 306 0.21 % 572,005 1,241 0.44 % Overnight fed funds purchased 47,490 63 0.26 % 6 - 0.25 % Subordinated debentures 74,017 1,987 5.38 % 73,841 2,294 6.23 % Other borrowings 18,259 299 3.28 % 23,132 430 3.73 % Total borrowings 139,766 2,349 3.37 % 96,979 2,724 5.63 % Total interest-bearing liabilities 439,354 2,655 1.21 % 668,984 3,965 1.19
%
Noninterest-bearing deposits 5,996,650 - - % 6,901,255 - -
%
Total deposits and interest-bearing liabilities 6,436,004$ 2,655 0.08 % 7,570,239$ 3,965 0.11
%
Other noninterest-bearing liabilities 198,278 164,307 Total liabilities 6,634,282 7,734,546 Shareholders' equity 820,955 811,357 Total liabilities and shareholders' equity$ 7,455,237 $ 8,545,903 Net interest income and net interest rate spread including noninterest-bearing deposits$ 155,413 4.72 %$ 139,849 3.67 % Net interest margin 4.70 % 3.65 % Tax-equivalent effect 0.02 % 0.02 % Net interest margin, tax-equivalent(3) 4.72 % 3.67
%
(1) Tax rate used to arrive at the TEY for the six months endedMarch 31, 2022 and 2021 was 21%. (2) AtMarch 31, 2021 ,$218.5 million of the total balance were interest-bearing deposits where interest expense was paid by a third party and not by the Company. OnOctober 1, 2021 , the Company reclassified the balances related to that program to noninterest bearing checking due to the product moving to noninterest bearing. (3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 42 -------------------------------------------------------------------------------- Table of Contents Provision for Credit Losses The Company recognized provision for credit losses of$32.3 million and$32.5 million for the three and six months endedMarch 31, 2022 , as compared to$30.3 million and$36.4 million for the comparable period in the prior fiscal year. Net charge-offs were$11.2 million for the quarter endedMarch 31, 2022 , compared to$3.7 million for the quarter endedMarch 31, 2021 . Net charge-offs attributable to the commercial finance portfolio for the quarter were$10.7 million and net charge-offs attributable to the consumer finance portfolio were$0.7 million . Noninterest Income Fiscal 2022 second quarter noninterest income decreased to$109.8 million from$113.5 million for the same period of the prior year. The decrease was driven by a reduction in payments fee income of$3.6 million and a net loss on our MoneyLion investment of$1.3 million , partially offset by an increase in rental income of$1.5 million . During the second quarter of fiscal year 2022, the Company sold the entirety of its equity investment in MoneyLion, recognizing a net loss of$1.3 million during the current period. Following the completion of MoneyLion's de-SPAC process and listing on theNew York Stock Exchange onSeptember 22, 2021 , the Company recognized a cumulative loss of approximately$0.4 million on the investment dating back to the fourth quarter of fiscal year 2021. The Company continues to be a strategic BaaS provider to MoneyLion. Noninterest income for the six months endedMarch 31, 2022 increased to$196.4 million from$158.9 million for the same period of the prior year, primarily driven by the gain on sale of Meta names and trademarks during the first quarter of fiscal 2022. Noninterest Expense Noninterest expense increased 7% to$103.2 million for the fiscal 2022 second quarter, from$96.0 million for the same quarter last year. The increase in expense was primarily driven by an increase in consulting expense, software expense, operating lease equipment depreciation and compensation expense. Compensation expense for the second quarter of fiscal 2022 includes$0.9 million of separation-related expenses. When comparing the fiscal 2022 second quarter to the first quarter of 2022, non-interest expense increased by$20.7 million .
Of the
Noninterest expense for the six months ended
Income Tax Expense The Company recorded an income tax expense of$8.0 million , representing an effective tax rate of 13.8%, for the fiscal 2022 second quarter, compared to$1.1 million , representing an effective tax rate of 1.9%, for the second quarter last year. The current quarter increase in income tax expense was primarily due to a reduction in renewable energy investment tax credit lending volume compared to the prior year period. The Company originated$1.3 million in solar leases during the fiscal 2022 second quarter, compared to$20.0 million in last year's second quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. For the six months endedMarch 31, 2022 , the Company originated$22.5 million in solar leases, compared to$58.5 million for the comparable prior year period. 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. Asset Quality 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 nonaccrual 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 nonaccrual status, but are instead written off when the collection of principal and interest become doubtful. 43 -------------------------------------------------------------------------------- Table of Contents 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. Nonaccrual loans and troubled debt restructurings are generally considered impaired. The Company believes that the level of allowance for credit losses atMarch 31, 2022 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See the section below titled "Allowance for Credit Losses" for further information.
The table below sets forth the amounts and categories of the Company's nonperforming assets. (Dollars in thousands)
March 31, 2022 September 30, 2021
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance $ 25,327 $ 19,330
Community banking - 14,915
Total nonaccruing loans and leases 25,327 34,245
Accruing loans and leases delinquent 90 days or more:
Commercial finance 5,701 12,489 Consumer finance 4,814 1,236 Tax services(1) - 7,962
Total accruing loans and leases delinquent 90 days or more
10,515 21,687
Total nonperforming loans and leases 35,842 55,932
Other Assets
Nonperforming operating leases 2,386 3,824
Foreclosed and repossessed assets:
Commercial finance 112 2,077
Total foreclosed and repossessed assets 112 2,077
Total other assets 2,498 5,901
Total nonperforming assets $ 38,340 $ 61,833
Total as a percentage of total assets 0.56 % 0.92 %
(1) Certain tax services loans do not bear interest.
At
Classified Assets. Federal regulations provide for the classification of certain
loans, leases, and other assets such as debt and equity securities considered by
the Bank's 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.
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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, at
March 31, 2022 , the Company had classified loans and leases of $167.9 million as
substandard, $4.0 million as doubtful and none as loss. At September 30, 2021 ,
the Company classified loans and leases of $264.2 million as substandard, $12.1
million as doubtful and none as loss.
Allowance for Credit Losses. Effective October 1, 2020 , the Company adopted ASU
2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments, and subsequent related ASUs
(collectively "Topic 326"), which measures credit loss for most financial
assets, including trade and other receivables, debt securities held to maturity,
loans, net investments in leases, purchased financial assets with credit
deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the
use of a current expected credit losses ("CECL") methodology to determine the
allowance for credit losses ("ACL") for loans and debt securities held to
maturity. CECL requires loss estimates for the remaining estimated life of the
assets to be measured using historical loss data, adjustments for current
conditions, and adjustments for reasonable and supportable forecasts of future
economic conditions.
The ACL represents management's estimate of expected credit losses over the life
of each financial asset as of the balance sheet date. The Company individually
evaluates loans and leases that do not share similar risk characteristics with
other financial assets for credit loss, generally this means loans and leases
identified as troubled debt restructurings or loans and leases on nonaccrual
status. All other loans and leases are evaluated collectively for credit loss. A
reserve for unfunded credit commitments such as letters of credit and binding
unfunded loan commitments is recorded in other liabilities on the Condensed
Consolidated Statements of Financial Condition.
Individually evaluated loans and leases are a key component of the ACL.
Generally, the Company measures credit loss on individually evaluated loans
based on the fair value of the collateral less estimated selling costs, as the
Company considers these financial assets to be collateral dependent. If an
individually evaluated loan or lease is not collateral dependent, credit loss is
measured at the present value of expected future cash flows discounted at the
loan or lease initial effective interest rate.
The Company's ACL totaled $88.6 million at March 31, 2022 , an increase compared
to $68.3 million at September 30, 2021 . The increase in the ACL at March 31,
2022 was primarily due to the seasonal tax services loan portfolio, which
increased $29.2 million during the fiscal 2022 second quarter.
The following table presents the Company's ACL as a percentage of its total
loans and leases.
As of the Period Ended
March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021
Commercial finance 1.66 % 2.04 % 1.77 % 1.73 % 1.77 %
Consumer finance 3.18 % 2.70 % 2.91 % 3.80 % 4.70 %
Tax services 35.76 % 1.60 % 0.02 % 58.99 % 12.90 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
Community banking - % - % 6.16 % 4.36 % 4.03 %
Total loans and leases 2.38 % 1.84 % 1.89 % 2.61 % 2.71 %
Total loans and leases excluding tax
services 1.59 % 1.84 % 1.90 % 1.94 % 2.04 %
45-------------------------------------------------------------------------------- Table of Contents Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company's ACL as a percentage of total loans and leases increased to 2.38% atMarch 31, 2022 from 1.84% atDecember 31, 2021 and from 1.89% atSeptember 30, 2021 . The increase in the total loans and leases coverage ratio was primarily driven by the seasonal tax services loan portfolio. The coverage ratio for the commercial finance portfolio decreased compared toDecember 31, 2021 due to reduction of specific reserves on two individually evaluated loan relationships. The Company expects to continue to diligently monitor the ACL 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 ACL atMarch 31, 2022 reflected an appropriate allowance against expected credit losses from the lending portfolio. Although the Company maintains its ACL 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 credit losses will not be required in future periods.
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 ACL, 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, 2021 . There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2022.
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 deposits and loan commitments, to maintain liquidity, and to meet operating expenses. AtMarch 31, 2022 , the Company had unfunded loan and lease commitments of$1.33 billion . Management believes that loan repayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. AsU.S. banking organizations, the Company and the Bank are required to comply with the regulatory capital rules adopted by theFederal Reserve and the OCC (the "Capital Rules") that became effective onJanuary 1, 2015 , subject to phase-in periods for certain requirements and other provisions of the Capital Rules. Under the Capital Rules and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. The Capital Rules require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). AtMarch 31, 2022 , both the Company and the Bank 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 AOCI opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. 46 -------------------------------------------------------------------------------- Table of Contents 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 analyses and has included this non-GAAP financial information, and corresponding reconciliation to total equity. The decrease in Tier 1 leverage capital ratio for the period is the result of higher quarterly average assets related to its seasonal tax business.Regulatory Capital is not affected by the unrealized loss on AOCI. The securities portfolio is made up of nearly all amortizing securities that should provide consistent cash flow and is not expected to require sales to realize the losses to fund future loan growth. Minimum to be Adequately Minimum to be Well Capitalized Under Capitalized Under Prompt Corrective Prompt Corrective At March 31, 2022 Company Bank Action Provisions Action Provisions Tier 1 leverage capital ratio 6.80 % 7.79 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 11.26 13.26 4.50 6.50 Tier 1 capital ratio 11.58 13.26 6.00 8.00 Total capital ratio 14.16 14.52 8.00 10.00
The following table provides a reconciliation of the amounts included in the table above for the Company.
Standardized
Approach(1)
(Dollars in thousands) March 31, 2022
Total stockholders' equity $ 763,406
Adjustments:
LESS: Goodwill , net of associated deferred tax liabilities 299,983
LESS: Certain other intangible assets
30,007
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
13,404
LESS: Net unrealized gains (losses) on available for sale securities
(69,838)
LESS: Noncontrolling interest 322 ADD: Adoption of Accounting Standards Update 2016-13
13,387
Common Equity Tier 1(1)
502,915
Long-term borrowings and other instruments qualifying as Tier 1
13,661
Tier 1 minority interest not included in common equity Tier 1 capital
208
Total Tier 1 capital 516,784
Allowance for credit losses 56,051
Subordinated debentures (net of issuance costs) 59,256
Total capital $ 632,091
(1) Capital ratios were determined using the Basel III capital rules that became
effective on January 1, 2015 . Basel III revised the definition of capital,
increased minimum capital ratios, and introduced a minimum common equity tier 1
capital ratio; those changes were fully phased in through the end of 2021.
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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) At March 31, 2022
Total stockholders' equity $ 763,406
LESS: Goodwill 309,505
LESS: Intangible assets 29,290
Tangible common equity 424,611
LESS: AOCI (69,374)Tangible common equity excluding AOCI $ 493,985
SinceJanuary 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 endedSeptember 30, 2021 for a summary of our contractual obligations as ofSeptember 30, 2021 . There were no material changes outside the ordinary course of our business in contractual obligations fromSeptember 30, 2021 throughMarch 31, 2022 .
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
See Note 19. Commitments and Contingencies in "Item 8. Financial Statements and Supplementary Data" in the Company's Annual Report on Form 10-K for its fiscal year endedSeptember 30, 2021 for discussion of the Company's off-balance sheet financing arrangements as ofSeptember 30, 2021 . There were no material changes fromSeptember 30, 2021 throughMarch 31, 2022 .
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