PATHWARD FINANCIAL, INC. META FINANCIAL GROUP , INC®. AND SUBSIDIARIES FORWARD-LOOKING STATEMENTSMeta Financial Group , Inc.® ("Meta" or "the Company" or "us") and its wholly-owned subsidiary, MetaBank® ("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 theSecurities 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; customer retention; loan and other product demand; important components of the Company's statements of financial condition and operations; growth and expansion; expectations concerning the Company's acquisitions and divestitures, including potential benefits of, and other expectations for the Company in connection with, such transactions; new products and services, such as those offered by MetaBank or the Company's Payments divisions (which include Meta Payment Systems, Refund Advantage, EPS Financial and Specialty Consumer Services); credit quality and adequacy of reserves; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the risk that the transaction withCentral Bank may not occur on a timely basis or at all; the parties ability to obtain third party and regulatory approvals, and otherwise satisfy the other conditions to closing the transaction withCentral Bank , on a timely basis or at all; factors relating to the Company's share repurchase program; actual changes in interest rates and the Fed Funds rate; additional changes in tax laws; the strength ofthe United States' economy, in general, and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of theBoard of Governors of theFederal Reserve System (the "Federal Reserve"), as well as efforts of theUnited States Congress and the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, market, and monetary fluctuations; the timely and efficient development of, and acceptance of, new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the risks of dealing with or utilizing third parties, including, in connection with the Company's refund advance business, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or acceptance of usage of Meta's strategic partners' refund advance products; any actions which may be initiated by our regulators in the future; the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry; our relationship with our primary regulators, theOffice of the Comptroller of the Currency and theFederal Reserve , as well as theFederal Deposit Insurance Corporation , which insures MetaBank's deposit accounts up to applicable limits; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk, in general, including, but not limited to, those risks involving MetaBank's divisions; the growth of the Company's business, as well as expenses related thereto; continued maintenance by MetaBank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion of which has been characterized as "brokered;" changes in consumer spending and saving habits; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase. The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report speak only as of the date hereof. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company's business and prospects are reflected under the caption "Risk Factors" and in other sections of the Company's Annual Report on Form 10-K for the Company's fiscal year endedSeptember 30, 2019 , and in other filings made with theSEC . 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. 47
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GENERAL
The Company, a registered unitary savings and loan holding company, is a
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 atDecember 31, 2019 , compared toSeptember 30, 2019 , and the consolidated results of operations for the three months endedDecember 31, 2019 and 2018. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year endedSeptember 30, 2019 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 .
EXECUTIVE SUMMARY
The Company recorded net income of$21.1 million , or$0.56 per diluted share, for the quarter endedDecember 31, 2019 , comparing favorably to net income of$15.4 million , or$0.39 per diluted share, that was recorded for the fiscal 2019 first quarter. Total revenue for the fiscal 2020 first quarter was$102.1 million , compared to$98.0 million for the same quarter in fiscal 2019, an increase of 4%. The improvement in revenue and net income was driven primarily by the Company's improved earning asset mix and growth in its core deposit base. Growth in loan and lease balances, along with the continued optimization of the earning asset mix of the balance sheet, during the first quarter of fiscal year 2020 led to net interest income of$64.7 million , net interest margin ("NIM") of 4.94% and net interest margin, tax-equivalent ("NIM, TE") of 4.99%. The Company's average gross loans and leases increased by$614.8 million , or 20%, while average noninterest-bearing deposits increased by$242.9 million , or 10%, when compared to the same period in fiscal 2019. Average deposits from the payments divisions increased nearly 12% to$2.78 billion when compared to the same period in fiscal 2019. Management anticipates that NIM will continue to expand as the Company continues to grow and optimize the loan and lease portfolio, along with leveraging growth from its payments divisions' core deposits. Overall, the Company's cost of funds averaged 1.01% during the fiscal 2020 first quarter, compared to 1.14% during the prior year period. Noninterest income for the quarter endedDecember 31, 2019 was$37.5 million , compared to$37.8 million for the same period of the prior year. This decrease was primarily due to a$2.6 million loss on sale of other during the fiscal 2020 first quarter. Additionally, increases in rental income, other income, payments card and deposit fees, and tax advance product fees partially offset the loss on sale of other when comparing the fiscal 2020 first quarter to the same period of the prior year. For the quarter endedDecember 31, 2019 , noninterest expense was$75.8 million . The increase in noninterest expense over the prior year fiscal first quarter was driven by increases in compensation and benefits expense, other expense, legal and consulting expense, tax advance product expense and operating lease equipment depreciation, partially offset by decreases in intangible amortization and card processing expense. OnNovember 20, 2019 , the Company announced that MetaBank entered into a definitive agreement withCentral Bank , a state-chartered bank headquartered inStorm Lake, Iowa , for the sale of theCommunity Bank division. The sale would include substantially all of theCommunity Bank's deposits, branch locations, fixed assets and employees and a portion of theCommunity Bank's loan portfolio. The final loan and deposit balances to be included in the transaction will depend on the outstanding balance of theCommunity Bank deposits at the time of closing. As ofDecember 31, 2019 , theCommunity Bank deposits were approximately$290 million . The final loan balances to be included in the transaction are expected to approximately match the finalCommunity Bank deposit amount. The closing of the transaction is subject to the satisfaction or waiver of certain conditions, the receipt of third party and regulatory approval and satisfaction of customary closing conditions. The transaction is expected to close in the 2020 fiscal second quarter. 48
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In connection with MetaBank's entry into the agreement withCentral Bank , the Company reclassified the assets and liabilities to be sold toCentral Bank as held for sale. In connection with the reclassification of the loans being sold in theCentral Bank transaction to held for sale, the Company recorded a reduction to the provision for loan and lease losses within the community bank portfolio of$1.8 million during the fiscal first quarter. The remainingCommunity Bank loans not proposed to be sold toCentral Bank would be retained by the Company under a servicing agreement withCentral Bank . Also during the fiscal 2020 first quarter, the Company recognized the following pre-tax expenses related to theCommunity Bank transaction:$0.6 million in legal and consulting expense and$0.3 million in compensation and benefits expense and other miscellaneous income and expense. During the quarter endedDecember 31, 2019 , the Company also disposed of assets related to a previously disclosedCommunity Bank agricultural relationship that were held in other real estate owned ("OREO"), which represented 46 basis points of non-performing assets as ofSeptember 30, 2019 . As part of this disposition, the Company recognized a$5.0 million loss from the sale of foreclosed property during the quarter endedDecember 31, 2019 , which is included in the "(Loss) gain on sale of other" line on the Consolidated Statements of Operations. The Company also recognized$1.1 million in deferred rental income and$0.2 million in OREO expenses related to these foreclosed properties. The Company's nonperforming assets atDecember 31, 2019 , were$29.8 million , representing 0.48% of total assets, compared to$56.5 million , or 0.91% of total assets atSeptember 30, 2019 . The decrease in nonperforming assets was primarily driven by the previously mentioned reduction in foreclosed and repossessed assets. During the quarter endedDecember 31, 2019 , the Company repurchased 899,371 of its shares, at an average price of$34.17 . This exhausted the remaining 319,228 shares that were available for repurchase by the Company at the beginning of fiscal 2020 under the share repurchase program announced during the fiscal 2019 second quarter. In addition, the Company also announced onNovember 20, 2019 , that its Board of Directors authorized a new share repurchase program to repurchase up to an additional 7,500,000 shares of the Company's outstanding common stock. The new authorization is effective fromNovember 21, 2019 throughDecember 31, 2022 . FINANCIAL CONDITION AtDecember 31, 2019 , the Company's total assets decreased by$2.0 million to$6.18 billion compared toSeptember 30, 2019 , primarily due to a decrease in the investment portfolio, while partially being offset by an increase in total loans and leases. Total cash and cash equivalents was$152.2 million atDecember 31, 2019 , an increase of 20%, from$126.5 million atSeptember 30, 2019 . The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and theFederal Reserve Bank . AtDecember 31, 2019 , the Company did not have any federal funds sold. The total investment portfolio decreased$69.4 million , or 5%, to$1.34 billion atDecember 31, 2019 , compared to$1.41 billion atSeptember 30, 2019 , as maturities, sales, and principal pay downs exceeded purchases. The Company's portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions ("NBQ"), 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 atDecember 31, 2019 were issued by aU.S. Government agency or instrumentality. Of the total MBS atDecember 31, 2019 ,$362.1 million , at fair value, were classified as available for sale, and$6.8 million , at cost, were classified as held to maturity. Of the total investment securities atDecember 31, 2019 ,$852.6 million , at fair value, were classified as available for sale and$116.3 million , at cost, were classified as held to maturity. During the three-month period endedDecember 31, 2019 , the Company did not purchase any investment securities. Loans held for sale atDecember 31, 2019 totaled$264.3 million , increasing from$148.8 million atSeptember 30, 2019 . This increase was primarily driven by the transfer of$251.9 million of community banking loans to held for sale and$16.2 million of SBA/USDA loans and consumer credit product loans originated into held for sale. See Note 3 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q for further discussion related to the community banking loans transferred to held for sale. The Company sold held for sale loans resulting in proceeds of$143.0 million during the fiscal year 2020 first quarter, which was primarily comprised of$111.7 million of consumer credit product loans sold. 49
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The Company's portfolio of gross loans and leases decreased by$68.1 million , or 2%, to$3.58 billion atDecember 31, 2019 , from$3.65 billion atSeptember 30, 2019 . The decrease was primarily driven by the transfer of community banking loans to held for sale, partially offset by an increase in national lending loans and leases. National Lending loans and leases increased$189.9 million , or 8% to$2.64 billion atDecember 31, 2019 compared toSeptember 30, 2019 . Within the National Lending portfolios, tax services loans increased$99.5 million , commercial finance loans and leases increased$78.4 million , warehouse finance portfolio increased$9.6 million , consumer finance portfolio increased$2.4 million atDecember 31, 2019 compared toSeptember 30, 2019 . During the first quarter of fiscal 2020 the Company began originating taxpayer advances and ERO loans in preparation of the 2019 tax season, which led to the increase in tax services loans compared toSeptember 30, 2019 . Community Banking loans decreased$258.1 million , or 21%, atDecember 31, 2019 compared toSeptember 30, 2019 , primarily due to the aforementioned transfer of loans to held for sale. See Note 5 to the "Notes to Condensed Consolidated Financial Statements"of this Quarterly Report on Form 10-Q. Through the Bank, the Company owns stock in the FHLB due to the Bank's membership and participation in this banking system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company's investment in such stock decreased$17.1 million , or 55%, to$13.8 million atDecember 31, 2019 , from$30.9 million atSeptember 30, 2019 . The decrease in FHLB stock directly correlates with lower short-term borrowings balances atDecember 31, 2019 compared toSeptember 30, 2019 . Total end-of-period deposits increased$180.6 million , or 4%, atDecember 31, 2019 to$4.52 billion as compared toSeptember 30, 2019 , primarily related to increases of$570.0 million in noninterest-bearing deposits, partially offset by decreases of$118.4 million in wholesale deposits,$118.1 million in interest-bearing checking deposits,$85.8 million in certificates of deposit,$34.6 million in money market deposits, and$32.3 million in savings deposits. The decrease in interest-bearing deposits, certificate of deposits, money market deposits and savings deposits was related to the transfer of$286.6 million of deposits to held for sale during the fiscal 2020 first quarter. See Note 3 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. The average balance of total deposits and interest-bearing liabilities was$5.13 billion for the three-month period endedDecember 31, 2019 , compared to$5.10 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the three-month period endedDecember 31, 2019 increased by$242.9 million , or 10%, to$2.73 billion compared to the same period in the prior year. The Company's total borrowings decreased$454.8 million , or 53%, from$861.9 million atSeptember 30, 2019 to$407.1 million atDecember 31, 2019 , primarily due to a decrease in short-term borrowings. The Company's short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base, primarily related to payroll processing timing with a higher volume of short-term borrowings on Monday and Tuesday, which are typically paid down throughout the week. This predictable fluctuation may be augmented near a month-end by a prefunding of certain programs. The Company also has an available no-fee line of credit with JP Morgan of$25.0 million with no funds advanced atDecember 31, 2019 . AtDecember 31, 2019 , the Company's stockholders' equity totaled$837.1 million , a decrease of$6.9 million , from$844.0 million atSeptember 30, 2019 . The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital. AtDecember 31, 2019 , the Bank continued to exceed all regulatory requirements for classification as a wellcapitalized institution. See "Liquidity and Capital Resources" for further information. 50
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Non-performing Assets and Allowance for Loan and Lease Losses
Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful. Loans and leases, or portions thereof, are charged off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired. The Company believes that the level of allowance for loan and lease losses atDecember 31, 2019 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See "Allowance for Loan and Lease Losses" below. 51
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The table below sets forth the amounts and categories of non-performing assets
in the Company's portfolio as of the dates set forth below. Foreclosed assets
include assets acquired in settlement of loans.
Non-Performing Assets As Of
(Dollars in thousands) December 31, 2019 September 30, 2019
Non-performing loans and leases
Non-accruing loans and leases:
Term lending $ 12,372 $ 12,146
Asset based lending 583 -
Factoring 205 1,669
Lease financing 729 308
SBA/USDA 2,704 255
Commercial finance 16,593 14,378
Total National Lending 16,593 14,378
Consumer one-to-four family real estate
and other 9 44
Total Community Banking 9 44
Total 16,602 14,422
Accruing loans and leases delinquent 90
days or more:
Held for sale loans - 964
Term lending 1,316 2,241
Lease financing 1,286 1,530
Insurance premium finance 3,131 3,807
Commercial finance 5,733 7,578
Consumer credit products 318 239
Other consumer finance 1,330 1,078
Consumer finance 1,648 1,317
Tax services - 2,240
Total National Lending 7,381 11,135
Total 7,381 11,135
Total non-performing loans and leases 23,983 26,521
Other assets Non-performing operating leases 4,466 457 Foreclosed and repossessed assets: Commercial finance 1,328
1,372
Agricultural real estate and operating - 28,122 Total 1,328 29,494 Total other assets 5,794 29,951 Total non-performing assets $ 29,777 $
56,472
Total as a percentage of total assets 0.48 % 0.91 %
At
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Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as "substandard," "doubtful" or "loss," with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank's determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management's review of its loans, leases, and other assets, atDecember 31, 2019 , the Company had classified$51.1 million of its assets as substandard,$0.3 million as doubtful and none as loss. AtSeptember 30, 2019 , the Company classified$40.6 million of its assets as substandard,$0.5 million as doubtful and none as loss. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan and lease losses based on management's evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance. Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan and lease losses. The current economic environment continues to show signs of stability in the Bank's markets. The Bank's average loss rates over the past three years were low relative to industry averages for such years. The Bank does not believe it is likely that these low loss conditions will continue indefinitely. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors, in order to determine the amount of risk the Company believes exists within that segment. Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the allowance for loan and lease losses atDecember 31, 2019 reflected an appropriate allowance against probable losses from the lending portfolio. Although the Company maintains its allowance for loan and lease losses at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan and lease losses will not be required in future periods. In addition, the Company's determination of the allowance for loan and lease losses is subject to review by the OCC, which can require the establishment of additional general or specific allowances. AtDecember 31, 2019 , the Company had established an allowance for loan and lease losses totaling$30.2 million , compared to$29.1 million atSeptember 30, 2019 . The increase in the Company's allowance for loan and lease losses was driven primarily by increases in the allowance of$1.6 million in tax service loans and$1.3 million in commercial finance, partially offset by a decrease of$1.8 million in the community banking portfolio, which was related to the transfer of loans to held for sale in connection with the pending sale of theCommunity Bank division. 53
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the allowance for loan and lease losses, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company's critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2019 . There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal year 2019.
RESULTS OF OPERATIONS
General. The Company recorded net income of$21.1 million , or$0.56 per diluted share, for the three months endedDecember 31, 2019 , compared to net income of$15.4 million , or$0.39 per diluted share, for the three months endedDecember 31, 2018 . Total revenue for the fiscal 2020 first quarter was$102.1 million , compared to$98.0 million for the same quarter in fiscal 2019, an increase of 4%. The increase in net income and revenue was primarily due to the improvement in net interest income, attributable to an enhanced interest-earning asset mix. Net interest income for the fiscal 2020 first quarter increased by$4.4 million , or 7%, to$64.7 million from$60.3 million for the same quarter in fiscal 2019, primarily due to growth in loan and lease balances within the Company's commercial and warehouse finance portfolios. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the quarter endedDecember 31, 2019 increased to 72%, from 60% for the quarter endedDecember 31, 2018 , while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 26% from 39% over that same period. Net interest margin was 4.94% in the fiscal 2020 first quarter, an increase of 34 basis points from 4.60% in the fiscal 2019 first quarter. NIM,TE was 4.99% in the fiscal 2020 first quarter, an increase of 23 basis points from 4.76% in the fiscal 2019 first quarter. The increases in NIM and NIM, TE in the fiscal 2020 first quarter, compared to the same period of the prior year, were primarily attributable to higher net loan and lease yields attained through the commercial finance portfolio. The overall reported tax equivalent yield ("TEY") on average earning assets increased by nine basis points to 5.98% when comparing the fiscal 2020 first quarter to the same period of the prior fiscal year. The improvement was driven primarily by the Company's improved earning asset mix, which reflects increased balances in the National Lending portfolio. The fiscal 2020 first quarter TEY on the securities portfolio decreased by 48 basis points to 2.65% compared to the same period of the prior year TEY of 3.13%, primarily due to a lower interest rate environment during the current period compared to the prior year period. The Company's average interest-earning assets for the fiscal 2020 first quarter increased by$10.0 million to$5.20 billion , from the comparable quarter in 2019. The increase was primarily attributable to growth in the Company's average loan and lease portfolio of$614.8 million , of which$576.8 million was related to an increase in National Lending loans and leases and$38.0 million was related to Community Banking loans. This increase was partially offset by a decrease in total investment securities of$659.1 million , which decreased as the Company continued to utilize sales of securities and cash flow from its amortizing securities portfolio to fund loan growth. The Company's average balance of total deposits and interest-bearing liabilities was$5.13 billion for the three-month period endedDecember 31, 2019 , compared to$5.10 billion for the same period in the prior year, representing an increase of 1%. This increase was primarily due to an increase in average noninterest-bearing deposits of$242.9 million , average interest-bearing checking of$60.8 million , average money market deposits of$26.2 million , and the average balance of total borrowings of$23.2 million , partially offset by decreases in average wholesale deposits of$225.7 million and average time deposits of$90.1 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 1.01% during the fiscal 2020 first quarter, compared to 1.14% for the 2019 first fiscal quarter. This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits. The Company's overall cost of deposits was 0.81% in the 2020 fiscal first quarter, compared to 0.92% in the same quarter of 2019. 54
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The following tables present, for the periods indicated, the Company's total
dollar amount of interest income from average interest-earning assets and the
resulting yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. Tax-equivalent adjustments
have been made in yield on interest-bearing assets and net interest margin.
Non-accruing loans and leases have been included in the table as loans carrying
a zero yield.
Three Months Ended December
31, 2019 2018
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 99,597 $ 412 1.65 % $ 45,383 $ 555 4.85 %
Mortgage-backed securities 376,358 2,389 2.53 % 381,285 2,698 2.81 %
Tax exempt investment
securities 490,982 2,339 2.40 % 1,237,198 7,803 3.17 %
Asset-backed securities 303,885 2,354 3.08 % 298,445 2,712 3.61 %
Other investment securities 197,513 1,429 2.88 % 110,879 710 2.54 %
Total investments 1,368,738 8,511 2.65 % 2,027,807 13,923 3.13 %
Total commercial finance 1,980,509 44,781 9.00 % 1,562,054 39,281 9.98 %
Total consumer finance 270,612 5,790 8.51 % 291,421 6,230 8.48 %
Total tax services 24,429 33 0.54 % 11,009 2 0.07 %
Total warehouse finance 265,564 4,174 6.25 % 99,818 1,632 6.49 %
National Lending loans and
leases 2,541,114 54,778 8.58 % 1,964,302 47,145 9.52 %
Community Banking loans 1,194,082 13,924 4.64 % 1,156,072 13,353 4.58 %
Total loans and leases 3,735,196 68,702 7.32 % 3,120,374 60,498 7.69 %
Total interest-earning
assets 5,203,531 $ 77,625 5.98 % 5,193,564 $ 74,976 5.89 %
Noninterest-earning assets 918,973 787,973
Total assets $ 6,122,504 $ 5,981,537
Interest-bearing
liabilities:
Interest-bearing checking $ 163,693 $ 153 0.37 % $ 102,880 $ 58 0.23 %
Savings 48,776 9 0.08 % 53,661 10 0.07 %
Money markets 80,528 205 1.01 % 54,288 64 0.47 %
Time deposits 114,924 595 2.06 % 205,049 881 1.71 %
Wholesale deposits 1,472,820 8,378 2.26 % 1,698,492 9,583 2.24 %
Total interest-bearing
deposits 1,880,741 9,340 1.98 % 2,114,370 10,596 1.99 %
Overnight fed funds
purchased 302,804 1,450 1.91 % 393,315 2,481 2.50 %
FHLB advances 110,000 678 2.45 % - - - %
Subordinated debentures 73,658 1,160 6.26 % 73,504 1,161 6.27 %
Other borrowings 33,589 346 4.10 % 30,058 466 6.15 %
Total borrowings 520,051 3,634 2.78 % 496,877 4,108 3.28 %
Total interest-bearing
liabilities 2,400,792 12,974 2.15 % 2,611,247 14,704 2.23 %
Noninterest-bearing deposits 2,732,062 - - % 2,489,148 - - %
Total deposits and
interest-bearing liabilities 5,132,854 $ 12,974 1.01 % 5,100,395 $ 14,704 1.14 %
Other noninterest-bearing
liabilities 150,319 128,900
Total liabilities 5,283,173 5,229,295
Shareholders' equity 839,331 752,242
Total liabilities and
shareholders' equity $ 6,122,504 $ 5,981,537
Net interest income and net
interest rate spread
including
noninterest-bearing deposits $ 64,651 4.97 % $ 60,272 4.75 %
Net interest margin 4.94 % 4.60 %
Tax-equivalent effect 0.05 % 0.16 %
Net interest margin,
tax-equivalent(2) 4.99 % 4.76 %
(1) Tax rate used to arrive at the TEY for the three months ended December 31,
2019 and 2018 was 21%.
(2) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
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Provision for Loan and Lease Losses. The Company recorded a$3.4 million provision for loan and lease losses for the quarter endedDecember 31, 2019 , as compared to a$9.1 million provision for loan and lease losses for the same period of the prior year. The decrease in provision was primarily within the consumer finance portfolio, as well as within the community bank portfolio, which was related to the transfer of loans to held for sale in connection with the pending sale of theCommunity Bank division. Also see Note 5 to the Condensed Consolidated Financial Statements included in this quarterly report. Noninterest Income. Noninterest income for the fiscal 2020 first quarter decreased to$37.5 million from$37.8 million for the same period in the prior fiscal year. This decrease was primarily due to a$2.6 million loss on sale of other during the fiscal 2020 first quarter compared to a gain on sale of other of$1.3 million during the fiscal 2019 first quarter. The loss on sale of other during the current period was driven primarily by the loss on sale of OREO, partially offset by gains on the sale of loans and leases. See Note 3 to the Condensed Consolidated Financial Statements included in this quarterly report. Additionally, increases in rental income, other income, payments card and deposit fees, and tax advance product fees partially offset the loss on sale of other when comparing the fiscal 2020 first quarter to the same period of the prior year. Noninterest Expense. Noninterest expense increased 2% to$75.8 million for the fiscal 2020 first quarter, from$74.3 million for the same quarter of fiscal 2019. The increase in noninterest expense when comparing the fiscal 2020 first quarter to the same period of the prior year was driven by increases in compensation and benefits expense, other expense, legal and consulting expense, tax advance product expense and operating lease equipment depreciation, partially offset by decreases in intangible amortization and card processing expense. Income Tax. The Company recorded income tax expense of$0.7 million , or an effective tax rate of 2.97%, for the fiscal 2020 first quarter, compared to an income tax benefit of$1.7 million , or an effective tax rate of (11.56)%, for the fiscal 2019 first quarter. The recorded income tax expense during the current quarter was due to an increase in net income before tax, as well as less investment tax credits recognized ratably when compared to the prior year quarter. The Company originated$17.9 million in solar leases during the fiscal 2020 first quarter, compared to$35.6 million in solar leases originated during the fiscal 2019 first quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser extent through itsCommunity Bank division, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. AtDecember 31, 2019 , the Company had commitments to originate and purchase loans and unused lines of credit totaling$1.04 billion . The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. InJuly 2013 , the Company's primary federal regulator, theFederal Reserve and the Bank's primary federal regulator, the OCC, approved final rules (the "Basel III Capital Rules") establishing a new comprehensive capital framework forU.S. banking organizations, which replaced earlier frameworks adopted in 1988 ("Basel I") and 2004 (Basel II). The Basel III Capital Rules generally implement theBasel Committee on Banking Supervision's (the "Basel Committee")December 2010 final capital framework referred to as "Basel III" for strengthening international capital standards. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to financial institution holding companies and their depository institution subsidiaries, including us and the Bank, as compared toU.S. general risk-based capital rules. TheBasel III Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other issues affecting the numerator in banking institutions' regulatory capital ratios. In addition, theBasel III Capital Rules implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies' rules. The Basel III Capital Rules became effective for us and the Bank onJanuary 1, 2015 , subject to phase-in periods for certain of their components and other provisions. 56
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Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by theFederal Reserve and the OCC. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). AtDecember 31, 2019 , both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements. The Company and the Bank took the accumulated other comprehensive income ("AOCI") opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis. Minimum to
be Minimum to be
Adequately Well Capitalized
Capitalized Under Under Prompt
Prompt Corrective Corrective Action
At December 31, 2019 Company Bank Action Provisions Provisions
Tier 1 leverage capital
ratio 8.28 % 9.70 % 4.00 % 5.00 %
Common equity Tier 1 capital
ratio 10.10 12.18 4.50 6.50
Tier 1 capital ratio 10.46 12.24 6.00 8.00
Total capital ratio 12.74 12.90 8.00 10.00
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The following table provides certain non-GAAP financial measures used to compute
certain of the ratios included in the table above, as well as a reconciliation
of such non-GAAP financial measures to the most directly comparable financial
measure in accordance with GAAP:
Standardized
Approach(1)
December 31, 2019
(Dollars in
Thousands)
Total stockholders' equity $ 837,068
Adjustments:
LESS: Goodwill , net of associated deferred tax liabilities 304,020
LESS: Certain other intangible assets
47,855
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
16,876
LESS: Net unrealized gains on available-for-sale securities
3,897
LESS: Noncontrolling interest
4,305
Common Equity Tier 1 Capital (1)
460,115
Long-term borrowings and other instruments qualifying as Tier 1
13,661
Tier 1 minority interest not included in common equity tier 1 capital
2,372
Total Tier 1 Capital
476,148
Allowance for loan and lease losses
30,239
Subordinated debentures (net of issuance costs) 73,684 Total Capital 580,071 (1) Capital ratios were determined using the Basel III capital rules that became effective onJanuary 1, 2015 . Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes are being fully phased in through the end of 2021. The following table provides a reconciliation of tangible common equity and tangible common equity excluding AOCI, each of which is used in calculating tangible book value data, to Total Stockholders' Equity atDecember 31, 2019 . 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. December 31, 2019 (Dollars in Thousands) Total Stockholders' Equity $ 837,068 LESS: Goodwill 309,505 LESS: Intangible assets 50,151 Tangible common equity 477,412 LESS: AOCI 3,895 Tangible common equity excluding AOCI 473,517 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 implementation of the capital conservation buffer by annual increments finished onJanuary 1, 2019 , so that 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. 58
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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, 2019 for a summary of our contractual obligations as ofSeptember 30, 2019 . There were no material changes outside the ordinary course of our business in contractual obligations fromSeptember 30, 2019 throughDecember 31, 2019 .
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
For discussion of the Company's off-balance sheet financing arrangements as ofDecember 31, 2019 , see Note 14 to our consolidated financial statements included in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 14 occur, the effect on the Company's capital and net income could be significant.
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