PATHWARD FINANCIAL, INC. This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8 "Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part I, Item 1 "Business."
General
The Company, a registered bank holding company, is aDelaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis.
EXECUTIVE SUMMARY
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 offering remote work options, implementing 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 under the CARES Act, which is being administered by the SBA. As ofSeptember 30, 2020 , the Company had 689 loans outstanding with a total of$219.0 million in loan balances that were originated as part of the program. From a credit perspective, the Company continues to monitor each of its lending portfolios. The Company has placed significant focus on its hospitality and movie theater loans and its small ticket equipment finance relationships. The credit management team has remained in regular contact with these borrowers. The Company's community bank hospitality loan balances increased to$179.3 million as ofSeptember 30, 2020 from$169.0 million as ofJune 30, 2020 and the average loan-to-value ratio on those loans was 60% at bothSeptember 30, 2020 andJune 30, 2020 . 67% of these hospitality relationships received PPP loans and, as ofSeptember 30, 2020 , 44% of the hospitality loan balances received some form of payment deferral modification and were still in their active deferment period.Community Bank loans to borrowers operating in the movie theater industry totaled$17.9 million as of bothSeptember 30, 2020 andJune 30, 2020 . As ofSeptember 30, 2020 , all movie theater loan balances were still in their active deferment period. As ofSeptember 30, 2020 , the Company had$287.2 million in small ticket equipment finance balances, of which$255.1 million were categorized within term lending and$32.1 million were categorized within lease financing. Borrowers with respect to 8% of the balances on these small ticket equipment finance relationships that received some form of payment deferral modification were still in their active deferment period. As ofSeptember 30, 2020 ,$170.0 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As ofJune 30, 2020 , loans and leases totaling$292.2 million were within their deferment period. In addition, the Company has made other COVID-19 related modifications, of which$23.3 million were still active as ofSeptember 30, 2020 compared to$34.6 million atJune 30, 2020 . The majority of the other modifications were related to adjusting the type or amount of the customer's payments. When excluding its seasonal tax services lending portfolio, the Company increased its allowance for loan and lease losses by$1.9 million atSeptember 30, 2020 , as compared toJune 30, 2020 . This was primarily due to the effects of the on-going COVID-19 pandemic and the continued economic uncertainty that it has caused. 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. 65 -------------------------------------------------------------------------------- Table of Contents The Company's capital position remained strong as ofSeptember 30, 2020 , even while absorbing the temporary impact from the EIP program, as described further below. As ofSeptember 30, 2020 , the Bank's capital leverage ratio based on average assets was 7.56%. The Bank's capital leverage ratio based onSeptember 30, 2020 period-end assets was 9.66%, which management believes better reflects the Company's anticipated balance sheet going forward. In addition, the Company has options available that can be used to effectively manage capital levels through these turbulent times, including a strong and flexible balance sheet.
For additional related information, see "Regulation and Supervision" and "Risk Factors."
EIP Program Update OnApril 29, 2020 , the Bank entered into an amendment of its existing agreement with the 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 were$942.2 million as ofSeptember 30, 2020 and$728.7 million as ofNovember 20, 2020 . The funds on these cards increased the Company's quarterly average noninterest deposit balances by$1.62 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 quarter endedSeptember 30, 2020 . The net impact to NIM was approximately 110 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 Company resumed its share repurchase program (the "Program"), which it had suspended duringMarch 2020 as a result of the uncertainty related to the COVID-19 pandemic. During the quarter endedSeptember 30, 2020 , the Company repurchased 260,816 shares, at an average price of$19.13 , under its Program, which is authorized throughDecember 31, 2022 . ThroughNovember 20, 2020 , the Company has repurchased a total of 1,364,416 of its shares, at a weighted average price of$24.66 , since the Company resumed repurchasing shares under the Program inSeptember 2020 . OnAugust 5, 2020 , the Bank entered into a three-year program management agreement withEmerald Financial Services, LLC , a wholly owned indirect subsidiary of H&R Block., pursuant to which the Bank 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.
The Company continued its support of various COVID-19 relief efforts including the EIP program and the PPP.
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Financial Highlights
Total gross loans and leases at September 30, 2020 decreased $337.3 million , or
9%, to $3.31 billion , compared to September 30, 2019 and decreased $182.6
million , or 5% when compared to June 30, 2020 .
Average deposits from the payments divisions for the fiscal 2020 fourth quarter
increased nearly 121% to $5.82 billion when compared to the same quarter in
fiscal 2019. A significant portion of the year-over-year increase reflected the
Company's participation in the EIP program. Excluding the balances on the EIP
cards, average payments deposits for the fiscal 2020 fourth quarter were
approximately $4.20 billion , representing an increase of 60% compared to the
same quarter in fiscal 2019.
Total revenue for the fiscal 2020 fourth quarter was $105.3 million , compared to
$101.6 million for the same quarter in fiscal 2019. Total revenue for the fiscal
year ended September 30, 2020 was $498.8 million , an increase of 2% from the
fiscal year ended September 30, 2019 .
Net interest income for the fiscal 2020 fourth quarter was $64.5 million ,
compared to $65.6 million in the comparable quarter in fiscal 2019. Total fiscal
year 2020 net interest income was $259.0 million versus $264.2 million in the
prior fiscal year.
NIM decreased to 3.77% for the fiscal 2020 fourth quarter from 4.95% over the
same period of the prior fiscal year, while the tax-equivalent net interest
margin ("NIM, TE") decreased to 3.79% from 5.00% for that same period in fiscal
2019. NIM for fiscal year 2020 was 4.09% compared to 4.91% during fiscal year
2019 while NIM, TE, decreased to 4.12% for fiscal year 2020 from 5.02% for
fiscal year 2019. The decrease in NIM during the fiscal 2020 fourth quarter and
fiscal year 2020 was primarily driven by excess cash associated with the
Company's participation in the EIP program.
Subsequent Events
Management has evaluated and identified subsequent events that occurred after
September 30, 2020 . See Note. 26 Subsequent Events for details on these events.
FINANCIAL CONDITION
At September 30, 2020 , the Company's total assets decreased by $90.8 million , or
1%, to $6.09 billion , compared to $6.18 billion at September 30, 2019 . The
reduction in assets was primarily due to a decrease in loans and leases and
decrease in the investment portfolio, partially offset by an increase in cash
and cash equivalents.
Total cash and cash equivalents were $427.4 million at September 30, 2020 , an
increase of $300.8 million from $126.5 million at September 30, 2019 . The
increase stemmed from the large influx of EIP deposits in the third quarter of
fiscal 2020, as discussed further above under "EIP Program Update." The Company
maintains its cash investments primarily in interest-bearing overnight deposits
with the FHLB of Des Moines and the FRB. At September 30, 2020 , the Company did
not have any federal funds sold.
The total investment portfolio decreased by $46.5 million , or 3%, to $1.36
billion at September 30, 2020 , compared to September 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") that 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 at September 30, 2020 were issued by a U.S. Government
agency or instrumentality. Of the total MBS, which had a fair value of $459.0
million at September 30, 2020 , $453.6 million were classified as AFS, and $5.4
million were classified as HTM. Of the total investment securities, which had a
fair value of $901.7 million at September 30, 2020 , $814.5 million were
classified as AFS and $87.2 million were classified as HTM. During fiscal 2020,
the Company purchased $229.3 million of investment securities available for sale
and did not purchase any investment securities held to maturity or MBS
securities.
Loans held for sale at September 30, 2020 totaled $183.6 million , increasing
from $148.8 million at September 30, 2019 . This increase was primarily driven by
the classification of community bank loans expected to sell during the first
quarter of fiscal 2021.
67-------------------------------------------------------------------------------- Table of Contents The Company's portfolio of loans and leases receivable decreased by$336.1 million , or 9%, to$3.32 billion atSeptember 30, 2020 , from$3.66 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 5 to the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K. National lending loans and leases increased$379.0 million , or 15%, to$2.83 billion atSeptember 30, 2020 compared toSeptember 30, 2019 . Within the national lending portfolio, commercial finance loans and leases increased$391.8 million and warehouse finance loans increased$30.5 million , while the consumer finance portfolio decreased by$44.0 million atSeptember 30, 2020 compared toSeptember 30, 2019 . Community banking loans decreased$716.3 million , or 60%, atSeptember 30, 2020 compared toSeptember 30, 2019 , due to reduction in commercial real estate and operating loans of$426.6 million and consumer one-to-four family real estate and other loans of$242.9 million . See Note 3 and Note 5 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Through the Bank, the Company owns stock in the FHLB due to the Bank's membership and participation in the 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 decreased by$3.8 million , or 12%, to$27.1 million atSeptember 30, 2020 , from$30.9 million atSeptember 30, 2019 . The decrease in stock was driven by a decrease in FHLB stock, which directly correlates with lower overnight borrowings balances from the FHLB atSeptember 30, 2020 compared to the prior year. Total end-of-period deposits increased by$642.2 million , or 15%, to$4.98 billion atSeptember 30, 2020 , as compared toSeptember 30, 2019 , primarily reflecting the Company's participation in the EIP program. Lower levels of consumer spending and various stimulus payments loaded on partner cards also contributed to the overall increase in total deposits. The increase in end-of-period deposits was partially offset by a decrease in wholesale deposits of$1.2 billion and a decrease in time certificate of deposits of$89.1 million . 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. The Company's total borrowings decreased$763.6 million , or 89%, from$861.9 million atSeptember 30, 2019 , to$98.2 million atSeptember 30, 2020 , primarily due to decreases in overnight borrowings and long term FHLB advances as the Company used the increase in total deposits to fund loans and lease and investment balances. 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 Bank also has an available no fee line of credit with JP Morgan of$25.0 million with no funds advanced atSeptember 30, 2020 .
See Note 13 to the "Notes to Consolidated Financial Statements," which are included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
AtSeptember 30, 2020 , the Company's stockholders' equity totaled$847.3 million , an increase of$3.4 million from$844.0 million atSeptember 30, 2019 . Stockholders' equity increased primarily as a result of an increase in additional paid in capital, accumulated other comprehensive income, and an increase in retained earnings. AtSeptember 30, 2020 , the Bank continued to meet regulatory requirements for classification as a well-capitalized institution. See Note 18 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 68 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The Company's results of operations are dependent on net interest income, provision for loan and lease losses, noninterest income, noninterest expense and income tax expense. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan and lease demand and deposit flows. Notwithstanding that a significant amount of the Company's deposits, primarily those attributable to the payments division, pay relatively low rates of interest or none at all, the Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The provision for loan and lease losses is the adjustment to the allowance for loan and lease losses balance for the applicable period. The allowance for loan and lease losses is management's estimate of probable loan and lease losses in the lending portfolio based upon loan and lease losses that have been incurred as of the balance sheet date. The Company's noninterest income is derived primarily from tax product fees, prepaid cards, credit products, deposit and ATM fees attributable to the payments division and fees charged on bank loans, leases and transaction accounts. Noninterest income is also derived from rental income, net gains on the sale of securities, net gains on the sale of loans and leases, as well as the Company's holdings of bank-owned life insurance. This income is offset by noninterest expenses, such as compensation and occupancy expenses associated with additional personnel and office locations, as well as card processing expenses and tax product expenses attributable to the payments division. Noninterest expense is also impacted by acquisition-related expenses, operating lease equipment depreciation expense, occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses. 69 -------------------------------------------------------------------------------- Table of Contents Average Balances, Interest Rates and Yields The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yields on interest-bearing assets and NIM. Non-accruing loans and leases have been included in the table as loans or leases carrying a zero yield. Fiscal Year Ended September 30, 2020 2019 2018 Average Interest Average Interest Average Interest Outstanding Earned / Yield / Outstanding Earned / Yield / Outstanding Earned / Yield / (Dollars in Thousands) Balance Paid Rate (1) Balance Paid Rate (1) Balance Paid Rate (1) Interest-earning assets: Cash & fed funds sold$ 1,236,027 $ 2,824 0.23 %$ 128,507 $ 3,494 2.72 %$ 87,536 $ 2,249 2.57 % Mortgage-backed securities 367,869 9,028 2.45 % 393,322 11,390 2.90 % 618,985 15,479 2.50 % Tax exempt investment securities 434,262 7,477 2.18 % 852,381 20,742 3.08 % 1,381,838 34,402 3.30 % Asset-backed securities 319,258 7,636 2.39 % 299,777 10,705 3.57 % 167,477 5,773 3.45 % Other investment securities 198,924 4,748 2.39 % 164,451 4,870 2.96 % 74,491 2,156 2.89 % Total investments 1,320,313 28,889 2.34 % 1,709,931 47,707 3.11 % 2,242,791 57,810 3.08 % Total commercial finance 2,100,464 169,189 8.05 % 1,717,869 169,941 9.89 % 474,766 36,726 7.74 % Total consumer finance 254,293 19,808 7.79 % 341,176 29,965 8.78 % 216,128 15,086 6.98 % Total tax services 148,650 6,390 4.30 % 110,503 8,193 7.41 % 112,583 819 0.73 % Total warehouse finance 292,952 17,919 6.12 % 188,483 11,826 6.27 % 14,425 879 6.09 % National Lending loans and leases 2,796,359 213,306 7.63 % 2,358,031 219,925 9.33 % 817,902 53,510 6.54 % Community Banking loans 975,618 47,822 4.90 % 1,180,594 54,603 4.63 % 1,009,255 44,965 4.46 % Total loans and leases 3,771,977 261,128 6.92 % 3,538,625 274,528 7.76 % 1,827,157 98,475 5.39 %
Total interest-earning assets 6,328,317
4.66 % 5,377,063$ 325,729 6.16 % 4,157,484$ 158,534 4.08 % Non-interest-earning assets 881,314 875,124 454,688 Total assets$ 7,209,631 $ 6,252,187 $ 4,612,172 Interest-bearing liabilities: Interest-bearing checking$ 189,704 $ 259 0.14 %$ 136,069 $ 356 0.26 %$ 90,199 $ 211 0.23 % Savings 50,888 18 0.03 % 53,434 38 0.07 % 56,834 37 0.07 % Money markets 57,573 422 0.73 % 60,719 419 0.69 % 48,320 123 0.25 % Time deposits 61,837 1,226 1.98 % 149,220 2,830 1.90 % 130,944 1,803 1.38 % Wholesale deposits 1,081,935 20,691 1.91 % 1,772,092 43,005 2.43 % 738,796 12,989 1.76 % Total interest-bearing deposits 1,441,937 22,616 1.57 % 2,171,534 46,648 2.15 % 1,065,093 15,163 1.42 % Overnight fed funds purchased 183,438 2,804 1.53 % 300,203 7,484 2.49 % 326,786 6,294 1.93 % FHLB advances 106,093 2,638 2.49 % 42,712 1,037 2.43 % 68,356 947 1.39 % Subordinated debentures 73,718 4,618 6.26 % 73,561 4,647 6.32 % 73,413 4,488 6.11 % Other borrowings 28,696 1,127 3.93 % 44,097 1,706 3.87 % 28,014 1,093 3.90 % Total borrowings 391,945 11,187 2.85 % 460,573 14,874 3.23 % 496,569 12,822 2.58 % Total interest-bearing liabilities 1,833,882 33,803 1.84 % 2,632,107 61,522 2.34 % 1,561,662 27,985 1.79 % Non-interest bearing deposits 4,396,132 - - % 2,685,502 - 0.00 % 2,455,360 - - % Total deposits and interest-bearing liabilities 6,230,014$ 33,803 0.54 % 5,317,609$ 61,522 1.16 % 4,017,022$ 27,985 0.70 % Other non-interest bearing liabilities 143,772 132,901
100,880
Total liabilities 6,373,786 5,450,510
4,117,902
Shareholders' equity 835,845 801,677
494,270
Total liabilities and stockholders' equity$ 7,209,631 $ 6,252,187 $ 4,612,172 Net interest income and net interest rate spread including non-interest bearing deposits$ 259,038 4.12 %$ 264,207 5.00 %$ 130,549 3.38 % Net interest margin 4.09 % 4.91 % 3.14 % Tax equivalent effect 0.03 % 0.11 % 0.27 % Net interest margin, tax equivalent (2) 4.12 % 5.02 % 3.41 % (1) The tax rates used to arrive at the TEY for the fiscal years endedSeptember 30, 2020 , 2019, and 2018 were 21%, 21%, and 24.53%, respectively. (2) Net interest margin expressed on a fully taxable equivalent basis ("net interest margin, tax equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. Management of the Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 70
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Rate / Volume Analysis
The following table presents, for the periods presented, the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. The table
distinguishes between the change related to higher outstanding balances and the
change due to the levels and volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume that cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate.
Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018
Increase / Increase / Total Increase / Increase / Total
(Decrease) (Decrease) Increase / (Decrease) (Decrease) Increase /(Dollars in Thousands) Due to Volume Due to Rate (Decrease) Due to Volume Due to Rate (Decrease) Interest-earning assets Cash & fed funds sold$ 5,181 $ (5,851) $ (670) $ 1,107 $ 138 $ 1,245 Mortgage-backed securities (704) (1,658) (2,362) (6,265) 2,176 (4,089) Tax exempt investment securities (8,310) (4,955) (13,265) (11,647) (2,014) (13,661) Asset-backed securities 659 (3,726) (3,069) 4,717 215 4,932 Other investment securities 919 (1,041) (122) 2,663 51 2,714 Total investments (8,999) (9,819) (18,818) (11,176) 1,073 (10,103) Total commercial finance 34,015 (34,767) (752) 120,394 12,822 133,216 Total consumer finance (7,033) (3,124) (10,157) 10,287 4,591 14,878 Total tax services 2,292 (4,095) (1,803) (15) 7,389 7,374 Total warehouse finance 6,396 (303) 6,093 10,923 24 10,947 National Lending loans and leases 37,120 (43,739) (6,619) 135,737 30,678 166,415 Community Banking Loans (9,902) 3,121 (6,781) 7,871 1,767 9,638 Total loans and leases 17,364 (30,764) (13,400) 119,831 56,222 176,053 Total interest-earning assets$ 13,546 $ (46,434) $ 32,888 $ 109,762 $ 57,433 $ 167,195 Interest-bearing liabilities Interest-bearing checking $ 110$ (207) $ (97) $ 118 $ 28$ 146 Savings (2) (18) (20) (2) 3 1 Money markets (22) 25 3 39 258 297 Time deposits (1,727) 123 (1,604) 277 749 1,026 Wholesale deposits (14,450) (7,864) (22,314) 23,599 6,417 30,016 Total Interest-bearing deposits (13,327) (10,705) (24,032) 21,132 10,352 31,484 Overnight fed funds purchased (2,346) (2,334) (4,680) (545) 1,735 1,190 FHLB advances 1,575 26 1,601 (444) 534 90 Subordinated debentures 10 (39) (29) 9 151 160 Other borrowings (604) 25 (579) 622 (9) 613 Total borrowings (2,072) (1,615) (3,687) (982) 3,034 2,052 Total interest-bearing liabilities$ (15,399) $
(12,320)
Net effect on net interest income$ 28,945 $ (34,114) $ 5,169 $ 89,612 $ 44,047 $ 133,659 71
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Comparison of Operating Results for the Fiscal Years Ended
General
The Company recorded net income of$104.7 million , or$2.94 per diluted share, for the fiscal year endedSeptember 30, 2020 , compared to$97.0 million , or$2.49 per diluted share, for the fiscal year endedSeptember 30, 2019 , an increase of$7.7 million . Total revenue for fiscal 2020 was$498.8 million , compared to$486.8 million for fiscal 2019, an increase of 2%. The increase in net income and revenue was primarily due to an increase in noninterest income and a decrease in noninterest expense, partially offset by a slight decrease in net interest income. Net Interest Income Net interest income for fiscal 2020 decreased by$5.2 million , or 2%, to$259.0 million from$264.2 million for the same period of the prior year. The decrease in net interest income was primarily due to a decrease in interest income of 10% to$292.8 million for fiscal 2020, from$325.7 million for the same period of the prior year. The decrease in interest income was primarily driven by lower overall loan balances and yields realized on the loan and lease portfolios along with a decrease in investment security balances, partially offset by a reduction in total interest expense. The average balance of loans and leases as a percentage of interest-earning assets for the fiscal year endedSeptember 30, 2020 decreased to 60%, from 66% for the fiscal year endedSeptember 30, 2020 , while the average balance of total investments as a percentage of interest-earnings assets decreased to 21%, from 32% over that same period. NIM was 4.09% for fiscal 2020, a decrease of 82 basis points from 4.91% in fiscal 2019. NIM,TE was 4.12% in fiscal 2019, an decrease of 90 basis points from 5.02% in fiscal 2019. The decreases in NIM and NIM, TE in fiscal 2020, compared to the same period of the prior year were primarily attributable to the increase in deposit balances related to the EIP program. 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 overall reported tax equivalent yield ("TEY") on average interest-earning assets decreased by 150 basis points to 4.66% when comparing fiscal 2020 to fiscal 2019. The reduction was driven primarily by excess low-yielding cash held at theFederal Reserve , along with a lower interest rate environment. The yield on the national lending portfolio decreased by 170 basis points while the yield on the community banking loan portfolio increased by 27 basis points. The fiscal 2020 TEY on the securities portfolio decreased by 77 basis points to 2.34% as compared to the same period of the prior year. The Company's average interest earning assets for fiscal 2020 increased$951.3 million , or 18%, to$6.33 billion , from$5.38 billion during 2019. The increase was primarily attributable to increases in average cash balances of$1.11 billion , average loan and lease balances of$233.4 million , partially offset by a decrease in total average investment securities of$389.6 million . The increase in average cash balances was due to the effects of the EIP program. The increase in the Company's average loan and lease balances was driven by an increase in national lending loans of$438.3 million , partially offset by a reduction$205.0 million in community banking loans. The decrease average investments was driven by the Company continuing 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 increased$912.4 million , or 17%, to$6.23 billion during fiscal 2020, from$5.32 billion during 2019. This increase was primarily due to increases in average noninterest-bearing deposits of$1.71 billion , partially offset by a decrease in average wholesale deposits of$690.2 million and a decrease in the average balance of total borrowings of$68.6 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 0.54% during fiscal 2020, compared to 1.16% during fiscal 2019. The cost of deposits was 0.39% during fiscal 2020, compared to 0.96% during fiscal 2019. 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, mainly due to the EIP program noted above. The Company believes that its growing, lower-cost deposit base gives it a distinct and significant competitive advantage, and even more so if interest rates rise, because the Company anticipates that its cost of funds will likely remain relatively low, increasing less than at many other banks. 72 -------------------------------------------------------------------------------- Table of Contents Provision for Loan and Lease Losses In fiscal 2020, the Company recorded$64.8 million in provision for loan and lease losses, compared to$55.7 million in fiscal 2019. The increase in provision was primarily within the retained community bank, commercial finance, and tax services portfolios, partially offset by a decrease in the consumer finance portfolio. Provision increases in the community bank and commercial finance portfolios were primarily attributable to movie theater, hospitality, and small ticket equipment finance relationships that have experienced ongoing stress related to the COVID-19 pandemic. Based on the Company's ongoing assessment of the COVID-19 pandemic, the Company recognized an additional provision for loan and lease losses of$26.4 million during the fiscal year endedSeptember 30, 2020 . The Company will continue to assess the impact to their customers and businesses as a result of COVID-19 and refine their estimate as more information becomes available. Additional provisions were also applied to loans and leases that received short-term payment deferrals. Also see Note 5 to the Consolidated Financial Statements included in this Annual Report on Form 10-K. Noninterest Income Noninterest income increased by$17.2 million , or 8%, to$239.8 million for fiscal 2020 from$222.5 million for fiscal 2019. This increase was largely due to the gain on sale of divestiture of$19.3 million related to the sale of theCommunity Bank division, as well as increases in other income of$4.7 million and rental income of$3.8 million . The increase in noninterest income was partially offset by a decrease in total tax product fee income of$6.0 million , a reduction in gain on sale of other of$3.4 million , a reduction in gain on sale of investments of$0.7 million , and a decrease in card fee income of$0.6 million . Noninterest Expense Noninterest expense decreased by$14.1 million , or 4%, to$319.1 million for fiscal 2020 from$333.2 million for fiscal 2019. This decrease in noninterest expense was largely driven by a decrease in compensation expense of$19.6 million , a decrease in impairment expense of$7.7 million , a decrease in intangible amortization expense of$6.7 million , and a decrease in occupancy and equipment expense of$1.1 million . The decrease in noninterest expense was partially offset by increases of$8.7 million in other expense,$6.7 million in operating depreciation expense,$3.5 million in legal and consulting expense, and$2.3 million in card processing expense. Income Tax Expense The Company recorded an income tax expense of$5.7 million for fiscal 2020, resulting in an effective tax rate of 4.9%, compared to an income tax benefit of$3.4 million and an effective tax rate of (3.4)%, in fiscal 2019. The recorded income tax expense during the period was primarily due to a reduction in investment tax credits from originated solar leases in fiscal year 2020 as compared to the fiscal year 2019. The Company originated$77.8 million in solar leases for the 2020 fiscal year, compared to$104.4 million during the 2019 fiscal year. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
Comparison of Operating Results for the Fiscal Years Ended
General
The Company recorded net income of$97.0 million , or$2.49 per diluted share, for the fiscal year endedSeptember 30, 2019 , compared to$51.6 million , or$1.67 per diluted share, for the fiscal year endedSeptember 30, 2018 , an increase of$45.4 million . Total revenue for fiscal 2019 was$486.8 million , compared to$315.1 million for fiscal 2018, an increase of 54%. The increase in net income and revenue was primarily due to the improvement in net interest income, attributable to the loans and leases acquired through the Crestmark Acquisition in the fourth quarter of fiscal 2018, along with an enhanced interest-earning asset mix. Net Interest Income Net interest income for fiscal 2019 increased by$133.7 million , or 102%, to$264.2 million from$130.5 million for the prior year. NIM increased to 4.91% in fiscal 2019 as compared to 3.14% in fiscal 2018. The increase in net interest income was primarily due to an increase in interest income of 105% to$325.7 million from$158.5 million for the prior year. The increase in interest income was primarily due to an increase in the Company's average earning assets of 29% to$5.38 billion during fiscal 2019 from$4.16 billion during 2018. 73 -------------------------------------------------------------------------------- Table of Contents The increase in average earnings assets was primarily attributable to growth in the Company's average loan and lease portfolio of$1.71 billion , of which$1.54 billion was related to an increase in National Lending loans and leases and$171.3 million was related to Community Banking loans. This increase was partially offset by a decrease in total investment securities of$532.9 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 increased$1.3 billion , or 32%, to$5.32 billion during fiscal 2019 from$4.02 billion during 2018. This increase was primarily due to increases in average wholesale deposits of$1.03 billion and average noninterest-bearing deposits of$230.1 million , partially offset by a decrease in the average balance of total borrowings of$36.0 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 1.16% during fiscal 2019, compared to 0.70% during fiscal 2018. This increase was primarily due to the interest-bearing time deposits acquired by the Company in connection with the Crestmark Acquisition in the fourth quarter of fiscal 2018. The Company's overall cost of deposits was 0.96% during fiscal 2019, compared to 0.43% during fiscal 2018. Provision for Loan Losses In fiscal 2019, the Company recorded$55.7 million in provision for loan losses, compared to$29.4 million in fiscal 2018. The increase in provision expense was primarily driven by loan and lease growth and increased net charge-offs within the commercial finance portfolio. During fiscal year 2019, the Company had net charge-offs of$24.9 million within its tax services portfolio, all of which were fully reserved for. Non-Interest Income Noninterest income increased by$38.0 million , or 21%, to$222.5 million for fiscal 2019 from$184.5 million for fiscal 2018, primarily attributable to a full year of business conducted by the Crestmark division following the Crestmark Acquisition inAugust 2018 . This increase was largely due to increases in rental income of$33.7 million , gain on sale of investments of$8.9 million , gain on sale of loans and leases of$4.9 million , deposits fees of$4.6 million , and other income of$4.5 million . The increase in noninterest income was partially offset by decreases in card fee income of$14.5 million and total tax product fee income of$3.7 million . The increase in rental income, gain on sale of loans, and other income was largely attributable to the Crestmark Acquisition. The increase in deposit fee income was primarily related to the growth and transition of certain product fee income from card fees to deposit fees, attributable to the Company's payments division. Non-Interest Expense Non-interest expense increased by$104.9 million , or 46%, to$333.2 million for fiscal 2019 from$228.2 million for fiscal 2018, primarily due to a full year of expenses attributable to the Crestmark division. This increase in noninterest expense was largely driven by an increase in compensation expense of$46.8 million and operating depreciation expense of$20.8 million when compared to the prior year. Also contributing to the increase when comparing fiscal 2019 to 2018, were increases in other expense of$14.4 million , impairment expense of$9.6 million , occupancy and equipment expense of$8.3 million and intangible amortization expense of$8.1 million . The increase in compensation and benefits was primarily due to the addition of Crestmark division employees and new hires in the second half of fiscal 2018 in support of Meta's National Lending and other business initiatives. The increase in operating depreciation expense was attributable to the Crestmark division. The impairment expense included$9.5 million related to the DC Solar relationship. Income Tax Expense The Company recorded an income tax benefit of$3.4 million for fiscal 2019, resulting in an effective tax rate of (3.4)%, compared to an income tax expense of$5.1 million and an effective tax rate of 9.0%, in fiscal 2018. Despite the increase in earnings, the Company recorded less income tax expense than the prior year due to multiple factors. Fiscal year 2018 included a$4.6 million income tax benefit recognized by the Company as a result of amending a historical tax return ofCrestmark Bancorp, Inc. The Company also recognized an investment tax credit in fiscal 2019, which reduced the Company's income tax expense by$27.1 million compared to$4.0 million in fiscal 2018, reflecting the generation of investment tax credits under the Company's initiatives in the renewable energy sector. Another factor that contributed to the reduction in both the income tax expense and effective tax rate were the provisions of the Tax Cuts and Jobs Act (the "Tax Act"), which lowered Meta's statutory rate from 24.53% in fiscal 2018 to 21% in fiscal 2019. 74 -------------------------------------------------------------------------------- Table of Contents Asset Quality AtSeptember 30, 2020 , non-performing assets, consisting of non-accruing loans and leases, accruing loans and leases delinquent 90 days or more, foreclosed real estate, repossessed property, and non-performing operating leases, totaled$48.0 million , or 0.79% of total assets, compared to$56.5 million , or 0.91% of total assets, atSeptember 30, 2019 . The decrease in NPAs was primarily attributable to a reduction of foreclosed real estate, partially offset by an increase in the commercial finance portfolio. As ofSeptember 30, 2020 , the Company had non-accruing loans and leases totaling$24.0 million and foreclosed and repossessed assets of approximately$10.0 million , or 0.2% of total assets. 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 . The Company maintains an allowance for loan and lease losses because it is probable that some loans and leases may not be repaid in full. AtSeptember 30, 2020 , the Company had an allowance for loan and lease losses of$56.2 million as compared to$29.1 million atSeptember 30, 2019 . The increase was driven by a$15.3 million increase in the commercial finance portfolio and a$14.2 million increase in the retained community bank portfolio, partially offset by a$2.5 million decrease in the consumer finance portfolio.
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
September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019
Commercial finance 1.30 % 1.36 % 1.28 % 0.80 % 0.76 %
Consumer finance 1.64 % 1.75 % 1.74 % 2.22 % 2.30 %
Tax services 0.06 % 59.67 % 22.22 % 1.62 % - %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
National Lending 1.20 % 1.68 % 1.92 % 0.90 % 0.86 %
Community Banking 4.59 % 2.55 % 1.49 % 0.68 % 0.68 %
Total loans and leases 1.70 % 1.88 % 1.81 % 0.84 % 0.80 %
Allowance for loan and lease losses as a percentage of the total loan and lease
portfolio was 1.70% at September 30, 2020 , compared to 0.80% at September 30,
2019 . This increase was primarily due to the Company's continued assessment of
the risks associated with the ongoing COVID-19 pandemic. The increase in the
total Company coverage ratio was due to increases to the coverage ratio within
the retained community bank portfolio and the commercial finance portfolio due
to identified risks impacting its movie theater, hospitality, and small ticket
equipment finance relationships stemming from the ongoing COVID-19 pandemic.
The ultimate impact of the COVID-19 pandemic on the Company's loan and lease
portfolio is difficult to predict due to the unprecedented uncertainty. Due to
this uncertainty, management has performed an evaluation of the loan and lease
portfolio in order to assess the impact on repayment sources and underlying
collateral that could result in additional losses. The framework for the
analysis was based on the Company's then-current allowance for loan and lease
losses ("ALLL") methodology with additional considerations. From this impact
assessment, additional reserve levels were estimated by increasing qualitative
factors. The additional reserves were estimated for loans that were granted
short-term payment deferrals related to financial stress stemming from the
COVID-19 pandemic along with other loans within certain high risk industries.
Loans within these high risk industries include the Community Bank's , movie
theater and hospitality loans as well as the Company's small ticket equipment
finance relationships within its commercial finance portfolio.
Based on the Company's ongoing assessment of the COVID-19 pandemic, the Company
recognized an additional provision for loan and lease losses of $26.4 million
during the year ended September 30, 2020 . The Company will continue to assess
the impact to their customers and businesses as a result of COVID-19 and refine
their estimate as more information becomes available.
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When adding the $2.8 million balance of the credit mark to the allowance for
loan and lease losses, the commercial finance coverage ratio increases to 1.41%
and the total loans and leases coverage ratio increases to 1.77%, as of
September 30, 2020 . Within commercial finance, the coverage ratio on Crestmark
division loans and leases was 1.42% at September 30, 2020 , as compared to 0.88%
at September 30, 2019 , and the coverage ratio on the insurance premium finance
portfolio over those same periods were 0.63% and 0.28%, respectively.
During fiscal year 2020, the Company had net charge-offs of $37.7 million , of
which $22.0 million were related to the tax services portfolio. The charge-offs
within the tax services portfolio were fully reserved for.
Management closely monitors economic developments both regionally and
nationwide, and considers these factors when assessing the appropriateness of
its allowance for loan and lease losses. The Company continued to assess each of
its loan and lease portfolios during the fiscal fourth 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, as noted above. Tax services coverage rates were
driven only by typical seasonal activity and are not expected to be materially
impacted by COVID-19 as the tax lending season is now complete. The Company
expects to continue to diligently monitor the allowance for 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 September 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.
Management's periodic review of the allowance for loan and lease losses is based
on various subjective and objective factors, including the Company's past loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions. While management may
allocate portions of the allowance for specifically identified problem loan and
lease situations, the majority of the allowance is based on both subjective and
objective factors related to the overall loan and lease portfolio and is
available for any loan and lease charge-offs that may occur. As stated
previously, there can be no assurance future losses will not exceed estimated
amounts, or that additional provisions for loan and lease losses will not be
required in future periods. In addition, the Bank is subject to review by the
OCC, which has the authority to require management to make changes to the
allowance for loan and lease losses, and the Company is subject to similar
review by the Federal Reserve . In determining the allowance for loan and lease
losses, the Company specifically identifies loans and leases it considers as
having potential collectability problems. Based on criteria established by ASC
310, Receivables, some of these loans and leases are considered to be "impaired"
while others are not considered to be impaired, but possess weaknesses that the
Company believes merit additional analysis in establishing the allowance for
loan and lease losses. All other loans and leases are evaluated by applying
estimated loss ratios to various pools of loans and leases. The Company then
analyzes other applicable qualitative factors (such as economic conditions) in
determining the aggregate amount of the allowance needed.
At September 30, 2020 , $5.1 million of the allowance for loan and lease losses
was allocated to impaired loans and leases. See Note 5 of the "Notes to
Consolidated Financial Statements," which is included in Part II, Item 8
"Financial Statements and Supplementary Data" of this Annual Report on Form
10-K. $3.8 million of the total allowance was allocated to other identified
problem loans and loan relationships, representing 1.2% of the related loan and
lease balances, and $47.3 million of the total allowance, representing 1.6% of
the related loan and lease balances, was allocated to the remaining overall loan
and lease portfolio based on historical loss experience and qualitative
factors. At September 30, 2019 , $1.9 million of the allowance for loan and lease
losses was allocated to impaired loans and leases. $2.6 million of the total
allowance was allocated to other identified problem loan and lease situations or
1.8% of related loan and lease balances, and $24.6 million of the total
allowance, representing 0.7%, was allocated against losses from the overall loan
and leases portfolio based on historical loss experience and qualitative
factors.
The Company maintains an internal loan and lease review and classification
process which involves multiple officers of the Company and is designed to
assess the general quality of credit underwriting and to promote early
identification of potential problem loans and leases. All loan officers are
charged with the responsibility of risk rating all loans and leases in their
portfolios and updating the ratings, positively or negatively, on an ongoing
basis as conditions warrant.
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The level of potential problem loans and leases is another predominant factor in
determining the relative level of risk in the loan and lease portfolio and in
determining the appropriate level of the allowance for loan and lease
losses. Potential problem loans and leases are generally defined by management
to include loans and leases rated as substandard by management that are not
considered impaired (i.e., non-accrual loans and leases and accruing troubled
debt restructurings), but there are circumstances that create doubt as to the
ability of the borrower to comply with repayment terms. The decision of
management to include performing loans and leases in potential problem loans and
leases does not necessarily mean that the Company expects losses to occur, but
that management recognizes a higher degree of risk associated with these loans
and leases. The loans and leases that have been reported as potential problem
loans and leases are predominantly commercial loans and leases covering a
diverse range of businesses and real estate property types. At September 30,
2020 , potential problem loans and leases totaled $67.9 million compared to $41.2
million at September 30, 2019 .
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, derived principally through its payments division, principal and interest payments on loans and leases and MBS, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, to maintain liquidity, and to meet operating expenses. The low-cost checking deposits generated through the Company's payments division may carry a greater degree of concentration risk than traditional consumer checking deposits but, based on experience, the Company believes that Paymentsgenerated deposits are a stable source of funding. To date, the Company has not experienced any material net outflows related to Payments-generated deposits, though no assurance can be given that this will continue to be the case.
The Bank is required by regulation to maintain sufficient liquidity to assure its safe and sound operation. In the opinion of management, the Bank is in compliance with this requirement.
Liquidity management is both a daily and long-term function of the Company's management strategy. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) the projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency or instrumentality obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and other wholesale funding sources. The Company is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company's liquidity or its ability to borrow additional funds. The primary investing activities of the Company are the origination of loans and leases, the acquisitions of companies and the purchase of securities. During the fiscal years endedSeptember 30, 2020 , 2019 and 2018, the Company originated loans and leases totaling$9.79 billion ,$10.97 billion and$4.39 billion , respectively. Purchases of loans and leases totaled$151.4 million ,$278.1 million , and$165.7 million during the fiscal years endedSeptember 30, 2020 , 2019 and 2017. During the fiscal years endedSeptember 30, 2020 , 2019 and 2018, the Company purchased MBS and other securities in the amount of$297.8 million ,$653.2 million and$849.5 million , respectively. Of these purchases, there were no securities designated as held to maturity in fiscal 2020 and fiscal 2019 and$0.9 million designated as held to maturity in fiscal 2018. AtSeptember 30, 2020 , the Company had unfunded loan and lease commitments of$1.22 billion . See Note 19 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Certificates of deposit scheduled to mature in one year or less atSeptember 30, 2020 totaled$248.0 million , of which$230.6 million were wholesale time deposits and$17.4 million were non-wholesale time deposits. Management believes that loan repayment and other sources of funds will be adequate to meet the Company's foreseeable short- and long-term liquidity needs. 77 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the Company's significant contractual obligations atSeptember 30, 2020 . Less than 1 More than 5 Contractual Obligations Total year 1 to 3 years 3 to 5 years years (Dollars in Thousands) Time deposits$ 20,223 $ 17,409 $ 2,814 $ - $ - Wholesale time deposits 253,949 230,562 23,387 - - Long-term borrowings 98,224 5,441 4,589 726 87,468 Operating leases 31,348 3,742 6,278 5,563 15,765 Total$ 403,744 $ 257,154 $ 37,068 $ 6,289 $ 103,233 DuringJuly 2001 , the Company's unconsolidated trust subsidiary, First Midwest Financial Capital Trust I, sold$10.3 million in floating-rate cumulative preferred securities. Proceeds from the sale were used to purchase trust preferred securities of the Company, which mature in 2031, and are redeemable at any time after five years. The capital securities are required to be redeemed onJuly 25, 2031 ; however, the Company has the option to redeem them earlier.
In 2016, the Company completed a public offering of
Through the Crestmark Acquisition, consummated in the fourth quarter of fiscal 2018, the Company acquired$3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the company. The subordinated debentures bear interest at LIBOR plus 3.00%, have a stated maturity of 30 years and are redeemable by the Company at par, with regulatory approval. See Note 10 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The Company and the Bank met regulatory requirements for classification as well-capitalized institutions atSeptember 30, 2020 . Based on current and expected continued profitability and subject to continued access to capital markets, management believes that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. See Note 18 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The payment of dividends and repurchase of shares have the effect of reducing stockholders' equity. Prior to authorizing such transactions, the Board of Directors considers the effect the dividend or repurchase of shares would have on liquidity and regulatory capital ratios. The Board of Directors approved a minimum management target, reflected in its capital plan, for the Bank to stay at or above an 8% Tier 1 capital to adjusted total assets ratio during fiscal 2018. Management and the Board of Directors are also mindful of new capital rules that will increase bank and holding company capital requirements and liquidity requirements. No assurance can be given that our regulators will consider our liquidity level, or our capital level, though substantially in excess of current rules pursuant to which the Company and the Bank are considered "well-capitalized," to be sufficiently high in the future.
Off-Balance Sheet Financing Arrangements
For discussion of the Company's off-balance sheet financing arrangements, see
Note 19 of "Notes to Consolidated Financial Statements," which is included in
Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K. Depending on the extent to which the commitments or
contingencies described in Note 19 occur, the effect on the Company's capital
and net income could be significant.
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Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented in this Annual
Report on Form 10-K have been prepared in accordance with GAAP, which require
the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, virtually all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction, or to the same extent, as the prices of goods and services.
There have not been any material effects on Meta's business due to inflation
during any of the last three fiscal years.
Impact of New Accounting Standards
See Note 1 to the Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified the policies described below as Critical Accounting Policies. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. Allowance for Loan and Lease LossesThe Company's allowance for loan and lease losses methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans and leases and other factors. Quantitative factors also incorporate known information about individual loans and leases, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan and lease structure, existing loan and lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Although management believes the levels of the allowance as of bothSeptember 30, 2020 andSeptember 30, 2019 were adequate to absorb probable incurred losses inherent in the loan and lease portfolio, a decline in local economic conditions or other factors could result in increasing losses.Goodwill and Identifiable Intangible Assets The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the Company records assets acquired, including identifiable intangible assets, liabilities assumed, and any non-controlling interest in the acquired business at their fair values as of the acquisition date. Any acquisition-related transaction costs are expensed in the period incurred. Results of operations of the acquired entity are included in the Consolidated Statements of Operations from the date of acquisition. Any measurement-period adjustments are recorded in the period the adjustment is identified. The excess of consideration paid over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired, including identifiable intangible assets, liabilities assumed, and any non-controlling interest often requires the use of significant estimates and assumptions. This may involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques such as estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. See Note 10.Goodwill and Intangibles to the Consolidated Financial Statements for further information. 79
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