PATHWARD FINANCIAL, INC.
AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Meta Financial Group , Inc.® ("Meta" or "the Company" or "us") and its
wholly-owned subsidiary, MetaBank®, National Association ("MetaBank" or "the
Bank") may from time to time make written or oral "forward-looking statements,"
including statements contained in this Quarterly Report on Form 10-Q, the
Company's other filings with the Securities and Exchange Commission (the "SEC"),
the Company's reports to stockholders, and other communications by the Company
and MetaBank, which are made in good faith by the Company pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by words such as "may," "hope,"
"will," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "continue," "could," "future," or the
negative of those terms, or other words of similar meaning or similar
expressions. You should carefully read statements that contain these words
because they discuss our future expectations or state other "forward-looking"
information. These forward-looking statements are based on information currently
available to us and assumptions about future events, and include statements with
respect to the Company's beliefs, expectations, estimates, and intentions, which
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond the Company's control. Such
risks, uncertainties and other factors may cause our actual growth, results of
operations, financial condition, cash flows, performance and business prospects
and opportunities to differ materially from those expressed in, or implied by,
these forward-looking statements. Such statements address, among others, the
following subjects: future operating results; expectations in connection with
the impact of the ongoing COVID-19 pandemic and related governmental actions on
the Company and MetaBank; customer retention; loan and other product demand;
expectations concerning acquisitions and divestitures; new products and
services, including those offered by the Meta Payment Systems, Refund Advantage,
EPS Financial and Specialty Consumer Services divisions; credit quality and
adequacy of reserves; technology; and the Company's employees. The following
factors, among others, could cause the Company's financial performance and
results of operations to differ materially from the expectations, estimates, and
intentions expressed in such forward-looking statements: maintaining our
executive management team; expected growth opportunities may not be realized or
may take longer to realize than expected; the potential adverse effects of the
ongoing COVID-19 pandemic and any governmental or societal responses thereto, or
other unusual and infrequently occurring events; actual changes in interest
rates and the Fed Funds rate; additional changes in tax laws; the strength of
the United States' economy, in general, and the strength of the local economies
in which the Company conducts operations; changes in, trade, monetary, and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System (the "Federal Reserve"); inflation,
market, and monetary fluctuations; the timely and efficient development of, and
acceptance of, new products and services offered by the Company or its strategic
partners, as well as risks (including reputational and litigation) attendant
thereto, and the perceived overall value of these products and services by
users; the Bank's ability to maintain its Durbin Amendment exemption; the risks
of dealing with or utilizing third parties, including, in connection with the
Company's refund advance business, the risk of reduced volume of refund advance
loans as a result of reduced customer demand for or usage of Meta's strategic
partners' refund advance products; our relationship with, and any actions which
may be initiated by our regulators; the impact of changes in financial services
laws and regulations, including, but not limited to, laws and regulations
relating to the tax refund industry and the insurance premium finance industry
and recent and potential changes in response to the ongoing COVID-19 pandemic
such as the CARES Act and the rules and regulations that may be promulgated
thereunder; technological changes, including, but not limited to, the protection
of our electronic systems and information; the impact of acquisitions and
divestitures; litigation risk; the growth of the Company's business, as well as
expenses related thereto; continued maintenance by MetaBank of its status as a
well-capitalized institution, particularly in light of our growing deposit base,
a portion of which has been characterized as "brokered;" changes in consumer
spending and saving habits; and the success of the Company at maintaining its
high quality asset level and managing and collecting assets of borrowers in
default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place
undue reliance on these forward-looking statements. The forward-looking
statements included in this Quarterly Report speak only as of the date hereof.
All subsequent written and oral forward-looking statements attributable to us or
any person acting on our behalf are expressly qualified in its entirety by the
cautionary statements contained or referred to in this section. Additional
discussions of factors affecting the Company's business and prospects are
reflected under the caption "Risk Factors" and in other sections of the
Company's Annual Report on Form 10-K for the Company's fiscal year ended
September 30, 2019 , and in other filings made with the SEC . The Company
expressly disclaims any intent or obligation to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of the Company or its subsidiaries, whether as a result of new
information, changed circumstances, or future events or for any other reason.
55
--------------------------------------------------------------------------------
Table of Contents
GENERAL
The Company, a registered bank holding company, is a Delaware corporation, the
principal assets of which are all the issued and outstanding shares of the Bank,
a national bank. Unless the context otherwise requires, references herein to the
Company include Meta and the Bank, and all direct or indirect subsidiaries of
Meta on a consolidated basis.
The Company's common stock trades on the NASDAQ Global Select Market under the symbol "CASH."
The following discussion focuses on the consolidated financial condition of the Company atJune 30, 2020 , compared toSeptember 30, 2019 , and the consolidated results of operations for the three and nine months endedJune 30, 2020 and 2019. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year endedSeptember 30, 2019 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 .
EXECUTIVE SUMMARY
COVID-19 Business Update The Company continues to focus on the well-being of its employees, partners and customers. Preventative health measures remain in place to protect employees and customers including mandating remote work options and social distancing measures where possible, restricting non-essential business travel and enhancing preventative cleaning services at all office locations. The Company's COVID-19 Crisis Command Center consisting of leadership and business continuity planning resources throughout the organization continues to effectively monitor possible interruptions related to the pandemic and to ensure business continuity.
The Company is participating in the PPP, which is being administered by the SBA.
As of
From a credit perspective, the Company continues to monitor each of its lending portfolios through these unprecedented times. Significant focus has been placed on the Company's hospitality loans and its small ticket equipment finance relationships. The credit management team has increased the monitoring of these relationships and has been in regular contact with these borrowers. The Company's community bank hospitality loan balances increased to$169.0 million as ofJune 30, 2020 from$160.1 million as ofMarch 31, 2020 and based on the most recently obtained appraisals, the average loan-to-value ratio on those loans improved to 60% atJune 30, 2020 from 61% atMarch 31, 2020 . 67% of the loan balances for these hotel relationships received PPP loans and 51% received some form of COVID-19 related payment deferral modification. As ofJune 30, 2020 , the Company had$245.9 million in small ticket equipment finance balances, of which$217.3 million were categorized within term lending and$28.6 million were categorized within lease financing. 27% of the loan balances on these small ticket equipment finance relationships received some form of COVID-19 related payment deferral or other modifications. The Company has granted deferral payments on a total of$352.1 million of loan, lease and rental equipment balances throughJune 30, 2020 as a result of interagency guidance issued onMarch 22, 2020 encouraging companies to work with customers impacted by COVID-19. As ofJune 30, 2020 ,$292.2 million of those balances were still in their deferment period. In addition, the Company has made other COVID-19 related modifications on a total of$52.9 million , of which$34.6 million were still active as ofJune 30, 2020 . The majority of the other modifications were related to adjusting the type or amount of the customer's payments. The Company increased its allowance for loan and lease losses during the fiscal third quarter primarily as a result of the ongoing economic uncertainty related to COVID-19 pandemic. The Company will continue to diligently monitor the allowance for loan and lease losses and adjust as necessary in future periods to maintain an appropriate and supportable level. 56 -------------------------------------------------------------------------------- Table of Contents The Company's capital position remained strong as ofJune 30, 2020 , even while absorbing the temporary impact from the Economic Impact Payment ("EIP") program, as described further below. As ofJune 30, 2020 , the Bank's capital leverage ratio based on average assets was 6.89%. In addition, the Company has options available that can be used to effectively manage capital levels through these turbulent times, including a very strong and flexible balance sheet. The Company's capital leverage ratio was impacted by approximately 278 basis points due to the increase in total asset balances as a result of the EIP program.
For additional related information, see "Regulation and Supervision" and "Risk Factors."
Economic Impact Payment Program Update OnApril 29, 2020 , the Bank entered into an amendment of its existing agreement with theU.S. Department of the Treasury's Bureau of the Fiscal Service ("Fiscal Service") to provide debit card services to support the distribution of a segment of the Economic Impact Payments payable by the Internal Revenue Service under the CARES Act. Under the EIP program, 3.6 million cards were delivered with total loads of$6.42 billion . As a result of the program, the Company saw a quick influx of deposits to its balance sheet inmid-May 2020 with limited visibility into the duration of those deposits. While this program's impact to earnings was negligible, it did have a significant impact on cash and deposit balances, leading to a net drag on the net interest margin along with pressuring the Company's leverage capital ratios. The total balances remaining on the EIP cards as ofJune 30, 2020 were$2.68 billion and$1.72 billion as ofJuly 31, 2020 . The funds on these cards increased the Company's quarterly average noninterest deposit balances by$2.32 billion , leading to an overall improvement in cost of deposits. This short term influx of deposits also led to excess cash balances held at theFederal Reserve during the current period, which yielded approximately 10 basis points in interest income, and increased the quarterly average of interest-earning assets compared to previous periods. This increase of lower yielding cash balances resulted in a drag to the overall yield on total interest-earning assets during the current period. The net impact to NIM was approximately 140 basis points. Conversions of the Bank and the Company Following receipt of the necessary regulatory approvals from theOffice of the Comptroller of the Currency and theFederal Reserve Bank of Minneapolis (the "FRB"), onApril 1, 2020 , the Bank converted from a federal thrift charter to a national bank charter and the Company converted from a savings and loan holding company to a bank holding company that has elected treatment as a financial holding company. The Bank now operates under the name "MetaBank, National Association". The Company and the Bank effected these conversions in order to more closely align the Bank's regulatory charter to its current and planned focus on national business that provides innovative financial solutions to consumers and businesses in niche markets often overlooked by traditional banks. See "Regulation and Supervision" and "Risk Factors" for additional related information. Business Developments The sale of MetaBank'sCommunity Bank division toCentral Bank closed onFebruary 29, 2020 and included all of theCommunity Bank's deposits, branch locations, fixed assets, employees, and a portion of theCommunity Bank's loan portfolio. The final deposit and loan balances included in the transaction totaled$290.5 million and$268.6 million , respectively. The remainingCommunity Bank loans, which totaled$799.4 million atJune 30, 2020 , have been retained by the Company and are under a servicing agreement withCentral Bank . As ofJune 30, 2020 the Company also held$48.1 million inCommunity Bank loan balances as held for sale. OnAugust 5, 2020 ,MetaBank, N.A. , a wholly-owned subsidiary of the Company ("MetaBank") entered into a three-year program management agreement (the "PMA") withEmerald Financial Services, LLC ("EFS"), a wholly owned indirect subsidiary of H&R Block, Inc. ("H&R Block"), pursuant to which MetaBank will serve as a facilitator for H&R Block's suite of financial services products, which include: Emerald Prepaid MasterCard®, Refund Transfers, Refund Advances, Emerald Advance® lines of credit, and other products through H&R Block's distribution channels. EFS has the right to terminate the PMA under certain circumstances, including if the Bank should lose its exemption from certain provisions of the Dodd-Frank Act known as the "Durbin Amendment." Based on current projections (or forecasts) MetaBank does not anticipate losing its Durbin Amendment exemption during the initial term of the PMA. Upon termination of the PMA or any of the related product schedules, EFS has the right to purchase or arrange the purchase of all of the affected accounts related to its ongoing product offerings. 57 -------------------------------------------------------------------------------- Table of Contents OnJune 23, 2020 ,Brett Pharr was promoted to Co-President and Chief Operating Officer of MetaBank to better align business lines with Meta's strategic initiatives.Brad Hanson remains Co-President and Chief Executive Officer of MetaBank and President and Chief Executive Officer of the Company.
During the fiscal 2020 third quarter, the Company extended its agreement with
Financial Highlights The Company recorded net income of$18.2 million , or$0.53 per diluted share, for the three months endedJune 30, 2020 , compared to net income of$29.3 million , or$0.75 per diluted share, that was recorded for the fiscal 2019 third quarter. Total revenue for the fiscal 2020 third quarter was$103.2 million , compared to$110.8 million for the same quarter in fiscal 2019, a decrease of 7%. During the fiscal 2020 third quarter, the Company recognized net interest income of$62.1 million , net interest margin ("NIM") of 3.28% and net interest margin, tax-equivalent ("NIM, TE") of 3.31%. The Company's average gross loans and leases increased by$23.8 million , or 1%, while average noninterest-bearing deposits increased by$3.35 billion , or 123%, when compared to the same period in fiscal 2019. Average deposits from the payments divisions increased nearly 131% to$6.32 billion when compared to the same period in fiscal 2019. The significant increase in deposits led to excess cash balances held at theFederal Reserve during the third quarter of fiscal 2020. This increase in lower yielding cash balances resulted in a net drag to the net interest margin of approximately 140 basis points. Overall, the Company's cost of funds averaged 0.28% during the fiscal 2020 third quarter, compared to 1.14% during the prior year period, primarily due to a decrease in overnight borrowings rates along with an increase in the average balance of the Company's noninterest-bearing deposits. Noninterest income for the three months endedJune 30, 2020 was$41.0 million , compared to$43.8 million for the same period of the prior year. This year-over-year decrease was primarily due to lower total tax product fee income and a reduction in gains on loan sales, partially offset by an increase in rental income. For the three months endedJune 30, 2020 , noninterest expense was$71.2 million , compared to$72.5 million for the same period of the prior year. The decrease in noninterest expense over the prior year fiscal third quarter was primarily driven by lower compensation and benefits, intangible amortization, total tax product expense, and occupancy and equipment expenses, partially offset by higher card processing expenses and operating lease equipment depreciation.
FINANCIAL CONDITION
AtJune 30, 2020 , the Company's total assets increased by$2.60 billion to$8.78 billion compared toSeptember 30, 2019 , primarily due to a$2.98 billion increase in cash and cash equivalents partially offset by decreases in loans and leases and investments. Total cash and cash equivalents was$3.11 billion atJune 30, 2020 , increasing from$126.5 million atSeptember 30, 2019 . The increase stemmed from the large influx of EIP deposits in the third quarter of fiscal 2020. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and the FRB. AtJune 30, 2020 , the Company did not have any federal funds sold. The total investment portfolio decreased$138.8 million , or 10%, to$1.27 billion atJune 30, 2020 , compared to$1.41 billion atSeptember 30, 2019 , as maturities, sales, and principal pay downs exceeded purchases. The Company's portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. All MBS held by the Company atJune 30, 2020 were issued by aU.S. Government agency or instrumentality. Of the total MBS atJune 30, 2020 ,$338.3 million , at fair value, were classified as available for sale, and$6.4 million , at cost, were classified as held to maturity. Of the total investment securities atJune 30, 2020 ,$825.6 million , at fair value, were classified as available for sale and$98.2 million , at cost, were classified as held to maturity. During the nine-months endedJune 30, 2020 , the Company purchased$60.0 million of investment securities. 58 -------------------------------------------------------------------------------- Table of Contents Loans held for sale atJune 30, 2020 totaled$79.9 million , decreasing from$148.8 million atSeptember 30, 2019 . This decrease was primarily driven by the sale of held for sale loans resulting in proceeds of$168.8 million during the fiscal 2020 first quarter, which was primarily comprised of$111.7 million of consumer credit product loans sold. The Company's portfolio of gross loans and leases decreased by$154.7 million , or 4%, to$3.50 billion atJune 30, 2020 , from$3.65 billion atSeptember 30, 2019 . The decrease was primarily driven by the sale of community banking loans, partially offset by an increase in national lending loans and leases. See Note 3 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. National Lending loans and leases increased$247.7 million , or 10% to$2.70 billion atJune 30, 2020 compared toSeptember 30, 2019 . Within the National Lending portfolios, commercial finance loans and leases increased$242.7 million , tax services loans increased$16.9 million , and warehouse finance portfolio increased$14.7 million , while the consumer finance portfolio decreased$26.6 million atJune 30, 2020 compared toSeptember 30, 2019 . The increase in commercial finance loan balances was largely driven by$215.5 million in PPP loans as ofJune 30, 2020 . The seasonality of the Company's tax services business led to the increase in tax services loans atJune 30, 2020 compared toSeptember 30, 2019 . Community banking loans decreased$402.4 million , or 33%, atJune 30, 2020 compared toSeptember 30, 2019 , primarily due to the aforementioned sale of theCommunity Bank division in the second quarter of fiscal 2020. See Note 4 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. The remainder of the decrease is attributable to the classification of$48.1 million in loan balances as held for sale along with continued principal payments and payoffs. 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$0.9 million , or 3%, to$31.8 million atJune 30, 2020 , from$30.9 million atSeptember 30, 2019 . The increase in stock was driven by the addition of stock in theFederal Reserve Bank as part of the conversion of the Bank from a federal thrift charter to a national bank charter. Partially offsetting that increase was a decrease in FHLB stock, which directly correlates with lower overnight borrowings balances from the FHLB atJune 30, 2020 compared toSeptember 30, 2019 . Total end-of-period deposits increased$3.25 billion , or 75%, atJune 30, 2020 to$7.59 billion as compared toSeptember 30, 2019 , primarily driven by an increase in noninterest bearing deposits of$4.18 billion , of which$2.68 billion was attributable to balances on the EIP cards. Lower levels of consumer spending and various stimulus payments loaded on partner cards also contributed to the overall increase in total deposits. Partially offsetting those increases were decreases of$813.5 million in wholesale deposits,$84.3 million in certificates of deposit, and$36.1 million in money market deposits. The decrease in wholesale deposits was primarily due to a shift in the Company's deposit balances from wholesale deposits to noninterest bearing deposits stemming from the balances on the EIP cards. The decrease in certificate of deposits and money market deposits was related to the sale of$290.5 million of total deposits included in the sale of theCommunity Bank division. See Note 4 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. The average balance of total deposits and interest-bearing liabilities was$6.09 billion for the nine-months endedJune 30, 2020 , compared to$5.37 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the nine-months endedJune 30, 2020 increased by$1.28 billion , or 47%, to$3.99 billion compared to the same period in the prior year. These increases were primarily attributable to the deposit balances on the EIP cards. The Company's total borrowings decreased$652.1 million , or 76%, from$861.9 million atSeptember 30, 2019 to$209.8 million atJune 30, 2020 , primarily due to the increase in total deposits. 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 atJune 30, 2020 . 59
-------------------------------------------------------------------------------- Table of Contents AtJune 30, 2020 , the Company's stockholders' equity totaled$829.9 million , an decrease of$14.0 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. AtJune 30, 2020 , the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution. 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 divisions that are included within noninterest-bearing deposits on
the Company's consolidated statement of financial condition. Negative balances
can relate to any of the following payments functions:
-Prefundings: The Company deploys funds to consumer cards prior to receiving
cash (typically 2-3 days) where the prefunding balance is netted at a pooled
partner level utilizing ASC 210-20.
-Discount fundings: The Company funds prepaid cards in an amount less than the
face value as a form of revenue sharing with partners. These discounts are
netted at a pooled partner level using ASC 210-20.
-Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow
cardholders traditional DDA overdraft protection services whereby cardholders
can spend a limited amount in excess of their available card balance. When
overdrawn, these accounts are re-classed as loans on the balance sheet within
the Consumer Finance category.
The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet -
Offsetting, for all Payments negative deposit balances with the exception of DDA
overdrafts. The following table summarizes the Company's negative deposit
balances within the payments division at June 30, 2020 and September 30, 2019 :
(Dollars in Thousands) June 30, 2020 September 30, 2019
Noninterest-bearing deposits
(351,454) (379,035)
Discount funding (51,580) (79,694)
DDA overdrafts (11,772) (11,069)
Noninterest-bearing checking, net
Nonperforming Assets and Allowance for Loan and Lease Losses
Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful. Loans and leases, or portions thereof, are charged-off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired. The Company believes that the level of allowance for loan and lease losses atJune 30, 2020 was appropriate and reflected probable losses related to these loans and leases; however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future. See the section below titled "Allowance for Loan and Lease Losses" for further information. 60 -------------------------------------------------------------------------------- Table of Contents The table below sets forth the amounts and categories of nonperforming assets in the Company's portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans. (Dollars in thousands) June 30, 2020 September 30, 2019 Nonperforming loans and leases Nonaccruing loans and leases: Term lending $ 16,524 $ 12,146 Factoring 733 1,669 Lease financing 3,518 308 SBA/USDA 1,510 255 Commercial finance 22,285 14,378 Total National Lending 22,285 14,378 Commercial real estate and operating 580 - Consumer one-to-four family real estate and other 121 44 Agricultural real estate and operating 1,769 - Total Community Banking 2,470 44 Total 24,755 14,422 Accruing loans and leases delinquent 90 days or more: Held for sale loans - 964 Term lending 2,578 2,241 Lease financing 1,907 1,530 Insurance premium finance 3,723 3,807 SBA/USDA 427 - Commercial finance 8,635 7,578 Consumer credit products 337 239 Other consumer finance 572 1,078 Consumer finance 909 1,317 Tax services - 2,240 Total National Lending 9,544 11,135 Commercial real estate and operating 258 - Agricultural real estate and operating 4,737 - Total Community Banking 4,995 - Total 14,539 11,135 Total nonperforming loans and leases 39,294 26,521 Other assets Nonperforming operating leases 9,983 457 Foreclosed and repossessed assets: Commercial finance 6,784 1,372 Agricultural real estate and operating - 28,122 Total 6,784 29,494 Total other assets 16,767 29,951 Total nonperforming assets $ 56,061 $ 56,472 Total as a percentage of total assets 0.64 % 0.91 % 61
-------------------------------------------------------------------------------- Table of Contents ThroughJune 30, 2020 , the Company has granted deferral payments on a total of$352.1 million of loan, lease and rental equipment balances as a result of interagency guidance issued onMarch 22, 2020 encouraging companies to work with customers impacted by COVID-19. As ofJune 30, 2020 ,$292.2 million of those balances were still in their deferment period.
At
During the fiscal 2020 first quarter, the Company disposed of assets related to a previously disclosedCommunity Bank agricultural relationship that were held in other real estate owned ("OREO"), which represented 46 basis points of nonperforming assets as ofSeptember 30, 2019 . Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as "substandard," "doubtful" or "loss," with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank's determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management's review of its loans, leases, and other assets, atJune 30, 2020 , the Company had classified$52.5 million of its assets as substandard,$4.1 million as doubtful and none as loss. AtSeptember 30, 2019 , the Company classified$40.6 million of its assets as substandard,$0.5 million as doubtful and none as loss. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan and lease losses based on management's evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors, in order to determine the amount of risk the Company believes exists within that segment. The Bank's average loss rates over the past three years were low relative to industry averages for such years. The Bank does not believe it is likely that these low loss conditions will continue indefinitely. AtJune 30, 2020 , the Company had established an allowance for loan and lease losses totaling$65.7 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$14.8 million in commercial finance,$12.3 million in the community banking portfolio, and$11.4 million in tax service loans, partially offset by a decrease of$1.9 million in consumer finance. 62 -------------------------------------------------------------------------------- Table of Contents The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases.
As of the Period Ended
June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019
Commercial finance 1.36 % 1.28 % 0.80 % 0.76 % 0.67 %
Consumer finance 1.75 % 1.74 % 2.22 % 2.30 % 2.22 %
Tax services 59.67 % 22.22 % 1.62 % - % 63.19 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
National Lending 1.68 % 1.92 % 0.90 % 0.86 % 1.44 %
Community Banking 2.55 % 1.49 % 0.68 % 0.68 % 0.70 %
Total loans and leases 1.88 % 1.81 % 0.84 % 0.80 % 1.20 %
Management closely monitors economic developments both regionally and
nationwide, and considers these factors when assessing the appropriateness of
its allowance for loan and lease losses. The Company continued to assess each of
its loan and lease portfolios during the fiscal third quarter and increased its
allowance for loan and lease losses as a percentage of total loans and leases in
the community bank and commercial finance portfolios primarily as a result of
the ongoing COVID-19 pandemic. Tax services coverage rates were driven only by
typical seasonal activity and are not expected to be materially impacted by
COVID-19 as the tax lending season is now complete. The Company expects to
continue to diligently monitor the allowance for loan and lease losses and
adjust as necessary in future periods to maintain an appropriate and supportable
level.
Management believes that, based on a detailed review of the loan and lease
portfolio, historic loan and lease losses, current economic conditions, the size
of the loan and lease portfolio and other factors, the level of the allowance
for loan and lease losses at June 30, 2020 reflected an appropriate allowance
against probable incurred losses from the lending portfolio. Although the
Company maintains its allowance for loan and lease losses at a level it
considers to be appropriate, investors and others are cautioned that there can
be no assurance that future losses will not exceed estimated amounts, or that
additional provisions for loan and lease losses will not be required in future
periods. In addition, the Company's determination of the allowance for loan and
lease losses is subject to review by the OCC, which can require the
establishment of additional general or specific allowances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the allowance for loan and lease losses, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company's critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2019 . There were no significant changes to these critical accounting policies and estimates during the first nine months of fiscal year 2020.
RESULTS OF OPERATIONS
General. The Company recorded net income of$18.2 million , or$0.53 per diluted share, for the three months endedJune 30, 2020 , compared to net income of$29.3 million , or$0.75 per diluted share, for the three months endedJune 30, 2019 . Total revenue for the fiscal 2020 third quarter was$103.2 million , compared to$110.8 million for the same quarter in fiscal 2019, a decrease of 7%. The decrease in net income was primarily due to an increase in provision expense along with a decrease in interest income. 63 -------------------------------------------------------------------------------- Table of Contents The Company recorded net income of$91.6 million , or$2.54 per diluted share, for the nine months endedJune 30, 2020 , compared to$76.8 million , or$1.95 per diluted share, for the same period in fiscal year 2019. Total revenue for the nine months endedJune 30, 2020 was$393.6 million , compared to$385.2 million for the same period of the prior year, an increase of$8.4 million , or 2%. The increase in net income was primarily due to an increase in noninterest income and a decrease in noninterest expense. Net interest income for the fiscal 2020 third quarter decreased by 7%, to$62.1 million from$67.0 million for the same quarter in fiscal 2019. The decrease was driven primarily by lower overall balances and yields realized on the loan and lease portfolios along with a decrease in investment securities balances, partially offset by a reduction in total interest expense. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months endedJune 30, 2020 decreased to 48%, from 68% for the three months endedJune 30, 2019 , while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 17% from 31% over that same period. These decreases were primarily due to the$2.31 billion increase in quarterly average interest-earning cash balances related to the EIP program.
For the nine months ended
Net interest margin was 3.28% in the fiscal 2020 third quarter, a decrease of 179 basis points from 5.07% in the fiscal 2019 third quarter. NIM,TE was 3.31% in the fiscal 2020 third quarter, a decrease of 184 basis points from 5.15% in the fiscal 2019 third quarter. The decreases in NIM and NIM, TE in the fiscal 2020 third quarter, compared to the same period of the prior year, were primarily driven by excess low-yielding cash held at theFederal Reserve stemming from the short term influx of EIP deposits, along with a lower interest rate environment. The increase of lower yielding cash balances resulted in a drag to the overall yield on total interest-earning assets during the current period. The net impact to NIM was approximately 140 basis points. The net effect of purchase accounting accretion contributed two basis points to NIM for the fiscal 2020 third quarter as compared to 25 basis points for the same period of the prior year. For the nine months endedJune 30, 2020 , NIM was 4.21%, a decrease of 69 basis points from 4.90% during the comparable prior year period. NIM, TE for the nine months endedJune 30, 2020 was 4.25%, a decrease of 77 basis points for the same period of the prior year. The overall reported tax equivalent yield ("TEY") on average earning assets decreased by 267 basis points to 3.59% when comparing the fiscal 2020 third quarter to the same period of the prior fiscal year. The fiscal 2020 third quarter TEY on the securities portfolio decreased by 87 basis points to 2.22% compared to the same period of the prior year TEY of 3.09%. The decrease TEY on the securities portfolio was primarily due to a lower interest rate environment during the current period compared to the prior year period while the decrease on the TEY on average earning assets most primarily driven by excess low-yielding cash held at theFederal Reserve . The Company's average interest-earning assets for the fiscal 2020 third quarter increased by$2.31 billion to$7.61 billion , from the comparable quarter in 2019. The increase was primarily attributable a significant increase in interest-earning cash driven by the effects of the EIP program. Total investment securities continued to decrease through sales of securities and cash flow from the Company's amortizing securities portfolio. Quarterly average loans and leases increased$23.8 million , of which$343.5 million was related to an increase in National Lending loans, partially offset by a$319.7 million decrease in Community Banking loans. The Company's average balance of total deposits and interest-bearing liabilities was$7.49 billion for the three months endedJune 30, 2020 , compared to$5.14 billion for the same period in the prior year, representing an increase of 46%. This increase was primarily driven by increases in average noninterest-bearing deposits of$3.35 billion and average interest-bearing checking of$88.4 million . The increase in average noninterest-bearing deposits was largely driven by$2.32 billion in funds on EIP cards. Partially offsetting those increases were decreases in average wholesale deposits of$704.2 million , average balances of total borrowings of$262.6 million , average time deposits of$102.8 million , and average money market deposits of$18.7 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 0.28% during the fiscal 2020 third quarter, compared to 1.14% for the fiscal 2019 third 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 0.17% in the fiscal 2020 third quarter, compared to 0.90% in the same quarter of 2019. 64 -------------------------------------------------------------------------------- Table of Contents The following tables present, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.
Three Months Ended
2020 2019
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 2,692,270 $ 783 0.12 % $ 80,100 $ 521 2.61 %
Mortgage-backed securities 342,174 2,269 2.67 % 421,725 3,063 2.91 %
Tax exempt investment securities 417,042 1,658 2.02 % 690,732 4,058 2.98 %
Asset-backed securities 336,562 1,770 2.11 % 307,581 2,701 3.52 %
Other investment securities 197,643 1,014 2.06 % 199,681 1,557 3.13 %
Total investments 1,293,420 6,711 2.22 % 1,619,719 11,379 3.09 %
Total commercial finance 2,160,175 40,375 7.52 % 1,775,905 44,332 10.01 %
Total consumer finance 247,824 4,635 7.52 % 364,633 8,178 9.00 %
Total tax services 39,845 - - % 45,142 - - %
Total warehouse finance 304,839 4,582 6.05 % 223,546 3,491 6.26 %
National Lending loans and leases 2,752,683 49,592 7.25 % 2,409,226 56,001 9.32 %
Community Banking loans 870,245 10,319 4.77 % 1,189,912 13,731 4.63 %
Total loans and leases 3,622,928 59,911 6.65 % 3,599,138 69,732 7.77 %
Total interest-earning assets 7,608,618 $ 67,406 3.59 % 5,298,957 $ 81,632 6.26 %
Noninterest-earning assets 830,589 820,474
Total assets $ 8,439,206 $ 6,119,431
Interest-bearing liabilities:
Interest-bearing checking(2) $ 226,382 $ - - % $ 137,950 $ 85 0.25 %
Savings 55,572 1 0.01 % 54,247 9 0.07 %
Money markets 40,091 33 0.33 % 58,782 107 0.73 %
Time deposits 25,392 113 1.78 % 128,165 633 1.98 %
Wholesale deposits 817,414 2,983 1.47 % 1,521,594 9,561 2.52 %
Total interest-bearing deposits 1,164,852 3,130 1.08 % 1,900,738 10,395 2.19 %
Overnight fed funds purchased 59,055 48 0.33 % 363,857 2,368 2.61 %
FHLB advances 110,000 670 2.45 % 54,341 324 2.39 %
Subordinated debentures 73,738 1,153 6.29 % 73,583 1,163 6.34 %
Other borrowings 27,032 268 3.98 % 40,653 414 4.08 %
Total borrowings 269,825 2,139 3.19 % 532,434 4,269 3.22 %
Total interest-bearing liabilities 1,434,677 5,269 1.48 % 2,443,172 14,664 2.42 %
Noninterest-bearing deposits 6,057,314 - - % 2,710,288 - - %
Total deposits and interest-bearing
liabilities 7,491,991 $ 5,269 0.28 % 5,143,460 $ 14,664 1.14 %
Other noninterest-bearing liabilities 122,940 149,207
Total liabilities 7,614,931 5,292,667
Shareholders' equity 824,276 826,764
Total liabilities and shareholders'
equity $ 8,439,206 $ 6,119,431
Net interest income and net interest
rate spread including
noninterest-bearing deposits $ 62,137 3.30 % $ 66,968 5.12 %
Net interest margin 3.28 % 5.07 %
Tax-equivalent effect 0.02 % 0.08 %
Net interest margin, tax-equivalent(3) 3.31 % 5.15 %
(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2020
and 2019 was 21%.
(2) Of the total balance, $226.1 million are interest-bearing deposits where
interest expense is paid by a third party and not by the Company.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
65--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended June 30,
2020 2019
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 992,935 $ 1,934 0.26 % $ 148,751 $ 2,989 2.69 %
Mortgage-backed securities 358,942 7,151 2.66 % 392,395 8,622 2.94 %
Tax exempt investment securities 454,202 6,130 2.28 % 952,501 17,999 3.20 %
Asset-backed securities 315,000 6,395 2.71 % 297,316 8,090 3.64 %
Other investment securities 195,851 3,718 2.54 % 150,888 3,301 2.93 %
Total investments 1,323,994 23,394 2.52 % 1,793,100 38,012 3.19 %
Total commercial finance 2,053,414 126,799 8.25 % 1,662,322 125,566 10.10 %
Total consumer finance 260,950 15,811 8.09 % 327,700 21,697 8.85 %
Total tax services 192,971 6,384 4.42 % 140,515 8,206 7.81 %
Total warehouse finance 294,852 13,542 6.13 % 168,081 7,912 6.29 %
National Lending loans and leases 2,802,186 162,536 7.75 % 2,298,618 163,382 9.50 %
Community Banking loans 1,048,689 36,571 4.66 % 1,175,667 40,519 4.61 %
Total loans and leases 3,850,875 199,106 6.91 % 3,474,285 203,901 7.85 %
Total interest-earning assets 6,167,804 $ 224,434 4.90 % 5,416,137 $ 244,902 6.16 %
Noninterest-earning assets 886,320 877,130
Total assets $ 7,054,124 $ 6,293,267
Interest-bearing liabilities:
Interest-bearing checking(2) $ 222,772 $ 480 0.29 % $ 129,656 $ 220 0.23 %
Savings 50,308 16 0.04 % 54,643 28 0.07 %
Money markets 63,077 390 0.83 % 56,987 263 0.62 %
Time deposits 75,231 1,134 2.01 % 160,740 2,229 1.85 %
Wholesale deposits 1,224,090 18,690 2.04 % 1,832,237 32,990 2.41 %
Total interest-bearing deposits 1,635,478 20,712 1.69 % 2,234,264 35,731 2.14 %
Overnight fed funds purchased 245,030 2,805 1.53 % 287,985 5,485 2.55 %
FHLB advances 110,000 2,019 2.45 % 18,114 324 2.39 %
Subordinated debentures 73,698 3,471 6.29 % 73,543 3,486 6.34 %
Other borrowings 29,792 903 4.05 % 43,690 1,286 3.93 %
Total borrowings 458,520 9,197 2.68 % 423,332 10,581 3.34 %
Total interest-bearing liabilities 2,093,998 29,909 1.91 % 2,657,595 46,312 2.33 %
Noninterest-bearing deposits 3,991,561 - - % 2,715,870 - - %
Total deposits and interest-bearing
liabilities 6,085,559 $ 29,909 0.66 % 5,373,465 $ 46,312 1.15 %
Other noninterest-bearing liabilities 136,722 128,924
Total liabilities 6,222,281 5,502,389
Shareholders' equity 831,843 790,878
Total liabilities and shareholders'
equity $ 7,054,124 $ 6,293,267
Net interest income and net interest
rate spread including
noninterest-bearing deposits $ 194,525 4.24 % $ 198,590 5.01 %
Net interest margin 4.21 % 4.90 %
Tax-equivalent effect 0.04 % 0.12 %
Net interest margin, tax-equivalent(3) 4.25 % 5.02 %
(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2020
and 2019 was 21%.
(2) Of the total balance, $226.1 million are interest-bearing deposits where
interest expense is paid by a third party and not by the Company.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
66
--------------------------------------------------------------------------------
Table of Contents
Provision for Loan and Lease Losses. The Company recorded a $15.1 million and a
$55.8 million provision for loan and lease losses for the three and nine months
ended June 30, 2020 , as compared to a $9.1 million and a $51.5 million provision
for loan and lease losses for the same period of the prior year. The increase in
provision for the quarter ended June 30, 2020 compared to the same period of the
prior year was primarily driven by the community banking and commercial finance
portfolios, partially offset by decreases in the consumer finance and tax
services portfolios. Provision increases in the community banking and commercial
finance portfolios was primarily attributable to the increased stress that the
hospitality loans and the small ticket equipment finance relationships have
experienced stemming from the ongoing economic uncertainty related to the
COVID-19 pandemic. Loans and leases that received short-term payment deferrals
were also analyzed and additional provision was applied as appropriate.
Also see Note 6 to the Condensed Consolidated Financial Statements included in this quarterly report.
Noninterest Income. Noninterest income for the fiscal 2020 third quarter decreased to$41.0 million from$43.8 million for the same period in the prior fiscal year. This year-over-year decrease was primarily due to lower tax product fee income and a reduction in gains on loan sales, partially offset by an increase in rental income. Noninterest income for the nine months endedJune 30, 2020 of$199.0 million , increased$12.5 million , or 7%, from$186.6 million in the same period in the prior fiscal year. This increase was primarily due to a$19.3 million gain on divestiture of theCommunity Bank division during the fiscal 2020 second quarter. See Note 4 to the Condensed Consolidated Financial Statements included in this quarterly report. Noninterest Expense. Noninterest expense decreased 2% to$71.2 million for the fiscal 2020 third quarter, from$72.5 million for the same quarter of fiscal 2019. The decrease in noninterest expense when comparing the fiscal 2020 third quarter to the same period of the prior year was primarily driven by lower compensation and benefits, intangible amortization, total tax product expense, and occupancy and equipment expenses, partially offset by higher card processing expenses and operating lease equipment depreciation.
Noninterest expense for the nine months ended
Income Tax. The Company recorded an income tax benefit of
The Company originated$1.3 million in solar leases during the fiscal 2020 third quarter, compared to$49.1 million during the fiscal 2019 third quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria. Insignificant income tax impacts are expected related to COVID-19.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, derived principally through its payments divisions, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. AtJune 30, 2020 , the Company had commitments to originate and purchase loans and unused lines of credit totaling$1.12 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. 67 -------------------------------------------------------------------------------- Table of Contents Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by theFederal Reserve and the OCC. The Basel III Capital Rules became effective for us and the Bank onJanuary 1, 2015 , subject to phase-in periods for certain of their components and other provisions. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). AtJune 30, 2020 , both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements. The Company and the Bank took the accumulated other comprehensive income ("AOCI") opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis. Minimum to be Minimum to be Adequately Well Capitalized Capitalized Under Under Prompt Prompt Corrective Corrective Action At June 30, 2020 Company Bank Action Provisions Provisions Tier 1 leverage capital ratio 5.91 % 6.89 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 11.51 13.82 4.50 6.50 Tier 1 capital ratio 11.90 13.86 6.00 8.00 Total capital ratio 14.99 15.12 8.00 10.00 68
--------------------------------------------------------------------------------
Table of Contents
The following table provides certain non-GAAP financial measures used to compute
certain of the ratios included in the table above, as well as a reconciliation
of such non-GAAP financial measures to the most directly comparable financial
measure in accordance with GAAP:
Standardized
Approach(1)
(Dollars in Thousands) June 30, 2020
Total stockholders' equity $ 829,909
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities 302,814
LESS: Certain other intangible assets 42,865
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
10,360
LESS: Net unrealized gains on available-for-sale securities 8,382
LESS: Noncontrolling interest 3,787
Common Equity Tier 1 Capital (1) 461,701
Long-term borrowings and other instruments qualifying as Tier 1 13,661
Tier 1 minority interest not included in common equity tier 1 capital
1,894
Total Tier 1 Capital 477,256
Allowance for loan and lease losses 50,338
Subordinated debentures (net of issuance costs) 73,765
Total Capital 601,359
(1) Capital ratios were determined using the Basel III capital rules that became
effective on January 1, 2015 . Basel III revised the definition of capital,
increased minimum capital ratios, and introduced a minimum common equity tier 1
capital ratio; those changes are being fully phased in through the end of 2021.
The following table provides a reconciliation of tangible common equity and
tangible common equity excluding AOCI, each of which is used in calculating
tangible book value data, to Total Stockholders' Equity. Each of tangible common
equity and tangible common equity excluding AOCI is a non-GAAP financial measure
that is commonly used within the banking industry.
(Dollars in Thousands) June 30, 2020
Total Stockholders' Equity $ 829,909
LESS: Goodwill 309,505
LESS: Intangible assets 43,974
Tangible common equity 476,430
LESS: AOCI 7,995Tangible common equity excluding AOCI 468,435
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, 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 throughJune 30, 2020 . 69 -------------------------------------------------------------------------------- Table of Contents OFF-BALANCE SHEET FINANCING ARRANGEMENTS For discussion of the Company's off-balance sheet financing arrangements atJune 30, 2020 , see Note 15 to our consolidated financial statements included in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 15 occur, the effect on the Company's capital and net income could be significant.
REGULATION AND SUPERVISION
The following information is intended to update, and should be read in conjunction with, the information contained under the caption "Regulation and Supervision" in the Company's Annual Report on Form 10-K.
Updates Related to COVID-19
The CARES Act
In response to the COVID-19 pandemic, the CARES Act was signed into law byPresident Trump onMarch 27, 2020 . The CARES Act provides for approximately$2.2 trillion in emergency economic relief measures. Many of the CARES Act's programs are dependent upon the direct involvement ofU.S. financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including theU.S. Department of Treasury , theFederal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible thatCongress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020. The following description of certain provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the Company and the Bank is qualified in its entirety by reference to the full text of CARES Act and the statutes, regulations, and policies described herein. Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company. Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review byCongress and the implementing regulations issued by federal regulatory authorities. The Company continues to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to the COVID-19 pandemic. Paycheck Protection Program. The CARES Act amended the SBA's loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. OnJune 5, 2020 , the President signed the Paycheck Protection Program Flexibility Act ("PPPFA") into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications onJuly 6, 2020 and extending the PPP application deadline toAugust 8, 2020 . It is anticipated that additional revisions to the SBA's interim final rules on forgiveness and loan review procedures will be forthcoming to address these and related changes. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto. Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as ofDecember 31, 2019 . Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so. The Company is applying this guidance to qualifying loan modifications. See Note 19. Subsequent Events for further information about the COVID-19-related loan modifications completed by the company. 70 -------------------------------------------------------------------------------- Table of Contents Temporary Community Bank Leverage Ratio Relief. Pursuant to the CARES Act, federal bank regulatory authorities adopted an interim rule, effective until the earlier of the termination of the coronavirus emergency declaration andDecember 31, 2020 , to (i) reduce the minimum Community Bank Leverage Ratio from 9% to 8% percent and (ii) give community banks two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.
Federal Reserve Programs and Other Recent Initiatives
Main Street Lending Program. The CARES Act encouraged theFederal Reserve , in coordination with the Secretary of theTreasury , to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. OnApril 9, 2020 , theFederal Reserve proposed the creation of theMain Street Lending Program ("MSLP") to implement certain of these recommendations. OnJune 15, 2020 , theFederal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. TheFederal Reserve is currently working to refine the MSLP's operational infrastructure and facilities and is expected to release further rules and operational guidance. The Bank continues to monitor developments thereto. Temporary Regulatory Capital Relief related to Impact of CECL. Concurrent with enactment of the CARES Act, federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The Company does expect to elect this option.
Updates Related to the Conversions of the Company and the Bank
As a result of theApril 1, 2020 conversions, the Company is a bank holding company that has elected to be a financial holding company, which is supervised and examined by the FRB and the Bank is a national bank supervised and examined by the OCC. Except as otherwise noted, the Company's and the Bank's post-conversion regulatory obligations under the National Bank Act ("NBA") and under the BHC Act and Regulation Y, respectively, are substantially consistent with the pre-conversion regulatory obligations of the Bank and the Company under HOLA and Regulation LL. Regulation and Supervision. As a BHC that has elected to become a FHC, the Company is supervised by theFederal Reserve and may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by theFederal Reserve in consultation with the Secretary of theTreasury ) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by theFederal Reserve ). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments. As a result of the conversion of the Bank to a national bank charter, the Bank derives its lending and investment powers from the National Bank Act ("NBA") and the OCC's implementing regulations promulgated thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC's regulatory requirements and limitations. In general, the Bank's legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the "combined general limit"). AtJune 30, 2020 , the Bank was in compliance with the combined general limit.
No Qualified Thrift Lender Test. As a national bank, the Bank is no longer required to be a qualified thrift lender (a "QTL") or satisfy any element of the QTL test applicable to federal savings associations.
71--------------------------------------------------------------------------------
Table of Contents
Limitations on Dividends and Other Capital Distributions. The NBA and related federal regulations govern the permissibility of dividends and capital distributions by a national bank. As a national bank, the Bank's board of directors may declare and pay dividends of as much of the undivided profits as the directors judge to be expedient, subject to the certain key restrictions, including: •unless approved by the OCC, the Bank may not declare a dividend if the total amount of all dividends (common and preferred), including the proposed dividend, declared in any current year exceeds the total of the Bank's net income of the current year to date, combined with the retained net income of current year minus one and current year minus two, less the sum of transfers required by the OCC (if any) and transfers required to be made to a fund for the retirement of any preferred stock (if any);
•the Bank may not declare a dividend if the Bank has sustained losses at any time that equal or exceed its undivided profits (i.e., retained earnings); and
•the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be "undercapitalized" as defined in the OCC's Prompt Corrective Action regulations.
Acquisitions. Federal law prohibits a BHC directly or indirectly, from: (a) acquiring control (as defined under the BHC Act) of another depository institution (or a holding company parent) without priorFederal Reserve approval; or (b) through merger, consolidation or purchase of assets, acquiring another depository institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without priorFederal Reserve approval. In evaluating applications by bank holding companies to acquire insured depository institutions, theFederal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors. OnApril 1, 2020 , theFederal Reserve's final rule for determining whether a company has control over a bank or other company for purposes of the BHC Act and the control presumptions promulgated under Regulation Y (the "Control Rule") became effective. The Control Rule provides specific guidance in place of theFederal Reserve's prior facts-and-circumstances approach to control evaluations under the BHC Act and Regulation Y.
© Edgar Online, source
