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; the
level of net charge-offs on loans and leases and the adequacy of the allowance
for credit losses; 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
including the deployment and efficacy of the COVID-19 vaccines, 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 operates; 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; the impact of our participation as prepaid card
issuer for the EIP program and potentially similar programs in the future;
losses from fraudulent or illegal activity; technological risks and
developments, and cyber threats, attacks or events; and the success of the
Company at maintaining its high quality asset level and managing and collecting
assets of borrowers in default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place
undue reliance on these forward-looking statements. The forward-looking
statements included in this Quarterly Report on Form 10-Q speak only as of the
date hereof, and the Company does not undertake any obligation to update,
revise, or clarify these forward-looking statements whether as a result of new
information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in its entirety by the cautionary statements contained
or referred to in this section. Additional discussions of factors affecting the
Company's business and prospects are reflected under the caption "Risk Factors"
and in other sections of the Company's Annual Report on Form 10-K for the
Company's fiscal year ended September 30, 2020 , 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.
45-------------------------------------------------------------------------------- Table of Contents GENERAL The Company, a registered bank holding company, is aDelaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis.
The Company's common stock trades on the NASDAQ Global Select Market under the symbol "CASH."
The following discussion focuses on the consolidated financial condition of the Company atDecember 31, 2020 , compared toSeptember 30, 2020 , and the consolidated results of operations for the three months endedDecember 31, 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, 2020 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, 2020 .
EXECUTIVE SUMMARY
Business Developments The following highlights certain business developments during the quarter endedDecember 31, 2020 : •Began our new three-year program withEmerald Financial Services, LLC , a wholly-owned indirect subsidiary of H&R Block, Inc., which the Company announced in the fourth quarter of fiscal 2020. Have already moved more than$150 million in deposits and began issuing Emerald Prepaid Mastercard® to applicants. •Completed negotiations with the Fiscal Service to disperse a second round of EIP stimulus payments through the distribution of prepaid cards. The Company began distributing cards under this authorization onJanuary 4, 2021 .
•Expanded our solar lending business, increasing our solar credit balance 29% to
•Increased resources dedicated to our Environmental, Social, and Governance
("ESG") activities by hiring an experienced Vice President of ESG and Community
Impact and forming a Board-level ESG committee to provide oversight.
Financial Highlights for the 2021 Fiscal First Quarter
The Company recorded net income of $28.0 million , or $0.84 per diluted share,
for the three months ended December 31, 2020 , compared to net income of $21.1
million , or $0.56 per diluted share, that was recorded for the fiscal 2020 first
quarter. Total revenue for the fiscal 2021 first quarter was $111.5 million ,
compared to $102.1 million for the same quarter in fiscal 2020, an increase of
9%.
During the fiscal 2021 first quarter, the Company recognized net interest income
of $66.0 million , NIM of 4.65% and net interest margin, tax-equivalent ("NIM,
TE") of 4.67%. The Company's average gross loans and leases decreased by $239.5
million , or 6%, while average noninterest-bearing deposits increased by $2.15
billion , or 79%, when compared to the same quarter in fiscal 2020. Average
deposits from the payments divisions for the fiscal 2021 first quarter increased
nearly 83% to $5.07 billion when compared to the same quarter in fiscal 2020. A
significant portion of the year-over-year increase reflected the Company's
participation in the EIP program, as described further below. The growth in
deposits led to excess cash balances held at the Federal Reserve during the
fiscal 2021 first quarter. This increase in lower yielding cash balances
resulted in a net drag to the net interest margin. Overall, the Company's cost
of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021
first quarter, compared to 1.01% during the prior year quarter, 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.
Noninterest income for the three months ended December 31, 2020 was $45.5
million , compared to $37.5 million for the same period of the prior year. This
was primarily due to an increase within gain on sale of other, an increase in
other income, and an increase in payments cards and deposit fees, partially
offset by a decrease in rental income. The increase within gain on sale of other
was primarily due to a loss on sale of foreclosed and repossessed assets
recognized during the first quarter of fiscal year 2020.
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Noninterest expense decreased 4% to $72.6 million for the fiscal 2021 first
quarter, from $75.8 million for the same quarter of last year, primarily driven
by decreases in compensation and benefits, other expense, tax product expense,
operating lease depreciation, and amortization expense, partially offset by
increases within impairment expense, legal and consulting expense, and card
processing expense.
The Company repurchased 1,864,474 shares during the first quarter at an average
price of $29.46 . Through January 20, 2021 , the Company repurchased an additional
300,000 of its shares, at a weighted average price of $38.73 .
COVID-19 Business Update
As of December 31, 2020 , the Company had 612 loans outstanding with total loan
balances of $194.3 million originated as part of the PPP, compared with 689
loans outstanding with total loan balances of $219.0 million for the quarter
ended September 30, 2020 .
As of December 31, 2020 , $84.2 million of the loans and leases that were granted
deferral payments by the Company were still in their deferment period. As of
September 30, 2020 , loans and leases totaling $170.0 million were within their
deferment period. In addition, the Company has made other COVID-19 related
modifications, of which $1.1 million were still active as of December 31, 2020
compared to $23.3 million at September 30, 2020 . The majority of the other
modifications were related to adjusting the type or amount of the customer's
payments.
The Company's capital position remained strong as of December 31, 2020 , even
while absorbing the temporary impact resulting from the receipt of deposits in
conjunction with EIP payments described below. In addition, the Company has
options available that can be used to effectively manage capital levels,
including a strong and flexible balance sheet.
EIP Program Update
The Bank is serving as the sole Financial Agent for distributing prepaid debit
cards used in the EIP program. Under the first round of EIP, approximately $6.42
billion in stimulus payments on 3.6 million prepaid cards were mailed to
individuals across the United States . The total balances remaining on the first
round of EIP cards were $605.1 million as of December 31, 2020 and $569.2
million as of January 20, 2021 .
On December 27, 2020 , the U.S. Congress , through the CAA, directed the Internal
Revenue Service ("IRS") to distribute a second round of EIP via the U.S.
Treasury to persons in the U.S. eligible to receive them. The Bank entered into
an amendment of its existing agreement with the Fiscal Service, under which the
Bank will act as a Financial Agent to Fiscal Service in connection with the
provision of prepaid debit card services to disburse a portion of the EIP
payments to eligible recipients via Bank-issued prepaid cards.
Under the second round, the Bank disbursed approximately $7.10 billion of EIP
payments, with initial payments having begun January 4, 2021 . The total balances
remaining on the second round of EIP cards were $5.80 billion as of January 20,
2021 .
While the EIP Program's impact to earnings is expected to be slightly positive,
it continues to temporarily have a significant impact on cash and deposit
balances, leading to a reduced NIM along with a corresponding impact on the
Company's leverage capital ratios. In conjunction with the Program and its
balance sheet impacts, the Bank was granted temporary exemption from its
requirements to maintain minimum regulatory capital leverage ratios by the
Officer of the Comptroller of the Currency due to deposits received as part of
the EIP program. The influx of EIP deposits is not expected to have any material
impact on the Company's risk-weighted capital ratios.
The Company is working with other banks to transfer deposits off-balance sheet
in an effort to relieve the impact of the substantial influx of deposits related
to the second round of EIP.
47-------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION AtDecember 31, 2020 , the Company's total assets increased by$1.17 billion to$7.26 billion compared toSeptember 30, 2020 , primarily due to a$1.16 billion increase in cash and cash equivalents. Total cash and cash equivalents was$1.59 billion atDecember 31, 2020 , increasing from$427.4 million atSeptember 30, 2020 . The increase primarily resulted from the receipt of EIP related deposits in the fiscal 2021 first quarter. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and the FRB. AtDecember 31, 2020 , the Company did not have any federal funds sold. The total investment portfolio decreased$51.3 million , or 4%, to$1.31 billion atDecember 31, 2020 , compared to$1.36 billion atSeptember 30, 2020 , as maturities 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 atDecember 31, 2020 were issued by aU.S. Government agency or instrumentality. Of the total MBS atDecember 31, 2020 ,$430.8 million , at fair value, were classified as available for sale, and$5.2 million , at cost, were classified as held to maturity. Of the total investment securities atDecember 31, 2020 ,$797.4 million , at fair value, were classified as available for sale and$76.2 million , at cost, were classified as held to maturity. During the three-months endedDecember 31, 2020 , the Company purchased$24.0 million of investment securities. Loans held for sale atDecember 31, 2020 totaled$133.7 million , decreasing from$183.6 million atSeptember 30, 2020 . This decrease was primarily driven by the sale$129.8 million of the retainedCommunity Bank loan portfolio toCentral Bank during the fiscal 2021 first quarter. The Company's total loans and leases increased by$125.4 million , or 4%, to$3.44 billion atDecember 31, 2020 , from$3.31 billion atSeptember 30, 2020 . The increase was primarily driven by increases in national lending loans and leases, partially offset by a decrease in community banking loans. See Note 6 to the "Notes to Condensed Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. National lending loans and leases increased$257.0 million , or 9% to$3.09 billion atDecember 31, 2020 compared toSeptember 30, 2020 . Within the National Lending portfolios, commercial finance loans and leases increased$115.1 million , tax services loans increased$89.5 million , consumer finance increased$26.9 million and warehouse finance increased$25.6 million atDecember 31, 2020 compared toSeptember 30, 2020 . The increase in commercial finance loan balances was largely driven by the term lending and asset based lending categories. The seasonality of the Company's tax services business led to the increase in tax services loans atDecember 31, 2020 compared toSeptember 30, 2020 . Community banking loans decreased$131.6 million , or 27%, atDecember 31, 2020 compared toSeptember 30, 2020 , primarily attributable to$100.4 million of loan balances classified 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 the
Total end-of-period deposits increased$1.23 billion , or 25%, atDecember 31, 2020 to$6.21 billion as compared toSeptember 30, 2020 , primarily driven by an increase in noninterest-bearing deposits of$1.22 billion , which was largely attributable to the balances on the EIP cards. The average balance of total deposits and interest-bearing liabilities was$5.52 billion for the three-months endedDecember 31, 2020 , compared to$5.13 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the three-months endedDecember 31, 2020 increased$2.15 billion , or 79%, to$4.88 billion compared to the same period in the prior year. These increases were primarily attributable to EIP related deposit balances. 48 -------------------------------------------------------------------------------- Table of Contents The Company's total borrowings decreased$1.5 million , or 1%, from$98.2 million atSeptember 30, 2020 to$96.8 million atDecember 31, 2020 . The Company also has an available no-fee line of credit with JP Morgan of$25.0 million with no funds advanced atDecember 31, 2020 . AtDecember 31, 2020 , the Company's stockholders' equity totaled$813.2 million , a decrease of$34.1 million , from$847.3 million atSeptember 30, 2020 . The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital. AtDecember 31, 2020 , the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution. See "Liquidity and Capital Resources" for further information. Payments Noninterest-bearing Checking Deposits The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's consolidated statement of financial condition. Negative balances can relate to any of the following payments functions: -Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20. -Discount fundings: The Company funds cards in an amount that is estimated to be less than final breakage values on card programs. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to one partner. -Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category. The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the payments division: (Dollars in Thousands) December 31, 2020 September 30,
2020
Noninterest-bearing deposits$ 6,101,971 $ 4,960,276 Prefunding (441,082) (528,131) Discount funding (69,567) (62,443) DDA overdrafts (9,725) (13,072)
Noninterest-bearing checking, net
RESULTS OF OPERATIONS
General
The Company recorded net income of$28.0 million , or$0.84 per diluted share, for the three months endedDecember 31, 2020 , compared to net income of$21.1 million , or$0.56 per diluted share, for the three months endedDecember 31, 2019 . Total revenue for the fiscal 2021 first quarter was$111.5 million , compared to$102.1 million for the same quarter in fiscal 2020, an increase of 9%. The increase in net income was primarily driven by an increase in noninterest income and a decrease in noninterest expense. Net Interest Income Net interest income for the fiscal 2021 first quarter increased by 2%, to$66.0 million from$64.7 million for the same quarter in fiscal 2020. The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall balances and yields realized on interest earning assets. The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months endedDecember 31, 2020 decreased to 62%, from 72% for the three months endedDecember 31, 2019 , while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 23% from 26% over that same period. These decreases were primarily due to the increase in interest-earning cash balances related to the EIP program. 49 -------------------------------------------------------------------------------- Table of Contents NIM was 4.65% in the fiscal 2021 first quarter, a decrease of 29 basis points from 4.94% in the fiscal 2020 first quarter. NIM,TE was 4.67% in the fiscal 2021 first quarter, a decrease of 32 basis points from 4.99% in the fiscal 2020 first quarter. The decreases in NIM and NIM, TE in the fiscal 2021 first quarter, compared to the same period of the prior year were primarily driven by the effects of the EIP program. The overall reported tax equivalent yield ("TEY") on average earning assets decreased by 116 basis points to 4.82% when comparing the fiscal 2021 first quarter to the same period of the prior fiscal year. The fiscal 2021 first quarter TEY on the securities portfolio decreased by 86 basis points to 1.79% compared to the same period of the prior year TEY of 2.65%. The decrease in 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 in TEY on average earning assets was primarily driven by excess low-yielding cash held at theFederal Reserve . The Company's average interest-earning assets for the fiscal 2021 first quarter increased by$432.9 million to$5.64 billion , from the comparable quarter in 2020. 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 decreased$239.5 million , of which$665.0 million was related to a decrease in Community Banking loans partially offset by a$425.5 million increase in National Lending loans. The Company's average balance of total deposits and interest-bearing liabilities was$5.52 billion for the three months endedDecember 31, 2020 , compared to$5.13 billion for the same period in the prior year, representing an increase of 8%. This increase was primarily driven by an increase in average noninterest-bearing deposits of$2.15 billion . The increase in average noninterest-bearing deposits was largely driven by the EIP related funding. Partially offsetting those increases were decreases in average wholesale deposits of$1.21 billion , average balances of total borrowings of$422.3 million , average time deposits of$97.5 million , and average money market deposits of$27.9 million . Overall, the Company's cost of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021 first quarter, compared to 1.01% for the fiscal 2020 first quarter. This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits. The Company's overall cost of deposits was 0.06% in the fiscal 2021 first quarter, compared to 0.81% in the same quarter of 2020. The following tables present, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield. 50
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Three Months Ended December 31,
2020 2019
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1) Interest-earning assets: Cash & fed funds sold$ 820,108 $ 842 0.41 %$ 99,597 $ 412 1.65 % Mortgage-backed securities 438,610 2,123 1.92 % 376,358 2,389 2.53 % Tax exempt investment securities 333,729 1,215 1.83 % 490,982 2,339 2.40 % Asset-backed securities 326,315 1,200 1.46 % 303,885 2,354 3.08 % Other investment securities 221,986 1,111 1.98 % 197,513 1,429 2.88 % Total investments 1,320,640 5,649 1.79 % 1,368,738 8,511 2.65 % Total commercial finance 2,417,691 45,630 7.49 % 1,980,509 44,781 9.00 % Total consumer finance 239,618 4,748 7.86 % 270,612 5,790 8.51 % Total tax services 25,104 8 0.13 % 24,429 33 0.54 % Total warehouse finance 284,199 4,933 6.89 % 265,564 4,174 6.25 % National Lending loans and leases 2,966,612 55,319 7.40 % 2,541,114 54,778 8.58 % Community Banking loans 529,085 6,336 4.75 % 1,194,082 13,924 4.64 % Total loans and leases 3,495,697 61,655 7.00 % 3,735,196 68,702 7.32 % Total interest-earning assets 5,636,445$ 68,146 4.82 % 5,203,531$ 77,625 5.98 % Noninterest-earning assets 845,378 918,973 Total assets$ 6,481,823 $ 6,122,504 Interest-bearing liabilities: Interest-bearing checking(2)$ 162,748 $ - - %$ 163,693 $ 153 0.37 % Savings 52,198 2 0.01 % 48,776 9 0.08 % Money markets 52,620 39 0.30 % 80,528 205 1.01 % Time deposits 17,390 57 1.30 % 114,924 595 2.06 % Wholesale deposits 261,136 699 1.06 % 1,472,820 8,378 2.26 % Total interest-bearing deposits 546,092 797 0.58 % 1,880,741 9,340 1.98 % Overnight fed funds purchased 11 - 0.25 % 302,804 1,450 1.91 % FHLB advances - - - % 110,000 678 2.45 % Subordinated debentures 73,822 1,147 6.16 % 73,658 1,160 6.26 % Other borrowings 23,870 203 3.37 % 33,589 346 4.10 % Total borrowings 97,703 1,350 5.48 % 520,051 3,634 2.78 % Total interest-bearing liabilities 643,795 2,147 1.32 % 2,400,792 12,974 5.15 % Noninterest-bearing deposits 4,880,352 - - % 2,732,062 - - % Total deposits and interest-bearing liabilities 5,524,147$ 2,147 0.15 % 5,132,854$ 12,974 1.01 % Other noninterest-bearing liabilities 151,528 150,319 Total liabilities 5,675,675 5,283,173 Shareholders' equity 806,148 839,331 Total liabilities and shareholders' equity$ 6,481,823 $ 6,122,504 Net interest income and net interest rate spread including noninterest-bearing deposits$ 65,999 4.67 %$ 64,651 4.97 % Net interest margin 4.65 % 4.94 % Tax-equivalent effect 0.02 % 0.05 % Net interest margin, tax-equivalent(3) 4.67 % 4.99 % (1) Tax rate used to arrive at the TEY for the three months endedDecember 31, 2020 and 2019 was 21%. (2) Of the total balance,$162.5 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. 51
-------------------------------------------------------------------------------- Table of Contents Provision for Credit Losses The Company recorded a$6.1 million provision for loan and lease losses for the three months endedDecember 31, 2020 , as compared to a$3.4 million provision for loan and lease losses for the same period of the prior year. The increase in provision for the quarter endedDecember 31, 2020 compared to the same period of the prior year was primarily driven by the commercial finance and consumer finance portfolios, partially offset by a decrease within the retained community bank portfolio. The Company adopted CECL effectiveOctober 1, 2020 , and its day one entry to increase the allowance for credit losses was$12.8 million . While this specific adoption amount did not have a direct impact to provision for credit loss for theDecember 31, 2020 quarter as the cumulative effect adjustment was recorded to retained earnings, the CECL accounting standard does accelerate the recognition of the reserves due to the forward-looking elements of the modeling. See Note 2 and Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Noninterest Income Noninterest income for the fiscal 2021 first quarter increased to$45.5 million from$37.5 million for the same period in the prior fiscal year. This was due primarily to an increase within gain on sale of other, an increase in other income, and an increase in payments cards and deposit fees, partially offset by a decrease in rental income. The increase within gain on sale of other was primarily due to a loss on sale of foreclosed and repossessed assets recognized during the first quarter of fiscal year 2020. The increase within other income was primarily due to the receipt of a portion of the Company's liquidation insurance claims of unearned premiums on the ReliaMax estate related to the Company's student loan portfolio. The amount received in the first quarter of fiscal 2021 was$3.5 million . Noninterest Expense Noninterest expense decreased 4% to$72.6 million for the fiscal 2021 first quarter, from$75.8 million for the same quarter of fiscal 2020. The decrease in noninterest expense when comparing the fiscal 2021 first quarter to the same period of the prior year was primarily driven by decreases in compensation and benefits, other expense, tax product expense, operating lease depreciation, and amortization expense, partially offset by increases within impairment expense, legal and consulting expense, and card processing expense. Income Tax Expense The Company recorded an income tax expense of$3.5 million , representing an effective tax rate of 10.8%, for the fiscal 2021 first quarter, compared to an income tax expense of$0.7 million , representing an effective tax rate of 3.0%, for the fiscal 2020 first quarter. The recorded income tax expense during the current quarter was primarily due to ratably recognized investment tax credits and lower forecast earnings due to COVID-19. The Company originated$38.5 million in solar leases during the fiscal 2021 first quarter, compared to$17.9 million during the fiscal 2020 first quarter. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
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.
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The Company believes that the level of allowance for credit losses at
December 31, 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 Credit
Losses" for further information.
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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) December 31, 2020 September 30, 2020
Nonperforming loans and leases
Nonaccruing loans and leases:
Term lending $ 13,741 $ 16,274
Asset based lending 917 -
Factoring 842 1,096
Lease financing 2,607 3,583
SBA/USDA 600 600
Commercial finance 18,707 21,553
Total National Lending 18,707 21,553
Commercial real estate and operating 18,456 580
Consumer one-to-four family real estate and other 164 50
Agricultural real estate and operating 1,769 1,769
Total Community Banking 20,389 2,399
Total 39,096 23,952
Accruing loans and leases delinquent >89 days past
due:
Held for sale loans - -
Term lending 385 266
Lease financing 1,042 4,344
Insurance premium finance 665 2,364
SBA/USDA - 427
Commercial finance 2,092 7,401
Consumer credit products 457 499
Other consumer finance 675 373
Consumer finance 1,132 872
Tax services - 1,743
Total National Lending 3,224 10,016
Commercial real estate and operating - 50
Agricultural real estate and operating - -
Total Community Banking - 50
Total 3,224 10,066
Total nonperforming loans and leases 42,320 34,018
Other assets
Nonperforming operating leases 3,713 4,045
Foreclosed and repossessed assets:
Commercial finance 7,178 9,957
Commercial real estate and operating 8 -
Total 7,186 9,957
Total other assets 10,899 14,002
Total nonperforming assets $ 53,219 $ 48,020
Total as a percentage of total assets 0.73 % 0.79 %
At
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As of December 31, 2020 , $84.2 million of the loans and leases that were granted
deferral payments by the Company were still in their deferment period. As of
September 30, 2020 , loans and leases totaling $170.0 million were within their
deferment period. In addition, the Company has made other COVID-19 related
modifications, of which $1.1 million were still active as of December 31, 2020
compared to $23.3 million at September 30, 2020 . The majority of the other
modifications were related to adjusting the type or amount of the customer's
payments.
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, at
December 31, 2020 , the Company had classified $78.6 million of its assets as
substandard, $3.5 million as doubtful and none as loss. At September 30, 2020 ,
the Company classified $61.6 million of its assets as substandard, $6.3 million
as doubtful and none as loss.
Allowance for Credit Losses. Effective October 1, 2020 , the Company adopted ASU
2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments, and subsequent related ASUs
(collectively "Topic 326"), which changes the impairment model for most
financial assets, including trade and other receivables, debt securities
held-to-maturity, loans, net investments in leases, purchased financial assets
with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13
requires the use of a CECL methodology to determine the ACL for loans and debt
securities held-to-maturity. CECL requires loss estimates for the remaining
estimated life of the assets to be measured using historical loss data,
adjustments for current conditions, and adjustments for reasonable and
supportable forecasts of future economic conditions.
The ACL represents management's estimate of current credit losses expected to be
incurred by the loan and lease portfolio over the life of each financial asset
as of the balance sheet date. The Company individually evaluates loans and
leases that do not share similar risk characteristics with other financial
assets for impairment, generally this means loans and leases identified as
troubled debt restructures or loans and leases on nonaccrual status. All other
loans and leases are evaluated collectively for impairment. A reserve for
unfunded credit commitments such as letters of credit and binding unfunded loan
commitments is recorded in other liabilities on the Condensed Consolidated
Statements of Financial Condition.
Individually evaluated loans and leases are a key component of the ACL.
Generally, the Company measures impairment on individually evaluated loans based
on the fair value of the collateral less estimated selling costs, as the Company
considers these financial assets to be collateral dependent. If an individually
evaluated loan or lease is not collateral dependent, impairment is measured at
the present value of expected future cash flows discounted at the loan or lease
initial effective interest rate.
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At December 31, 2020 , the Company had established an ACL totaling $72.4 million ,
compared to $56.2 million at September 30, 2020 . The increase in the allowance
at December 31, 2020 when compared to September 30, 2020 , was primarily due to
the adoption of the CECL accounting standard noted above, as well as additional
increases during the fiscal 2021 first quarter in the commercial finance
portfolio of $2.8 million , tax services portfolio of $1.4 million , and consumer
finance portfolio of $1.4 million , partially offset by an additional decrease
within the retained community bank portfolio of $2.2 million . The CECL
methodology requires loss estimates for the remaining estimated life of the
assets to be measured using historical loss data, adjustments for current
conditions, and adjustments for reasonable and supportable forecasts of future
economic conditions, which led to the increase in the ACL as of the October 1,
2020 adoption date.
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
October 1,
December 31, 2020 2020(1) September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019
Commercial finance 1.88 % 1.85 % 1.30 % 1.36 % 1.28 % 0.80 %
Consumer finance 4.39 % 4.31 % 1.64 % 1.75 % 1.74 % 2.22 %
Tax services 1.53 % 0.06 % 0.06 % 59.67 % 22.22 % 1.62 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
National Lending 1.89 % 1.86 % 1.20 % 1.68 % 1.92 % 0.90 %
Community Banking 4.01 % 3.37 % 4.59 % 2.55 % 1.49 % 0.68 %
Total loans and leases 2.10 % 2.08 % 1.70 % 1.88 % 1.81 % 0.84 %
(1) Represents the Company's allowance coverage ratio upon the adoption of the
Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and
allowance balances plus the CECL allowance adjustment.
Management closely monitors economic developments and considers these factors
when assessing the appropriateness of its ACL. The Company continued to assess
each of its loan and lease portfolios during the fiscal 2021 first quarter. The
increase from September 30, 2020 to December 31, 2020 was primarily due to the
adoption of ASU 2016-13 on October 1, 2020 . The increase in the tax services
coverage rates were driven by typical seasonal activity. The Company expects to
continue to diligently monitor the ACL and adjust as necessary in future periods
to maintain an appropriate and supportable level.
Management believes that, based on a detailed review of the loan and lease
portfolio, historic loan and lease losses, current economic conditions, the size
of the loan and lease portfolio and other factors, the level of the ACL at
December 31, 2020 reflected an appropriate allowance against inherent credit
losses from the lending portfolio. Although the Company maintains its ACL at a
level it considers to be appropriate, investors and others are cautioned that
there can be no assurance that future losses will not exceed estimated amounts,
or that additional provisions for loan and lease losses will not be required in
future periods. In addition, the Company's determination of the ACL 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 ACL, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company's critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2020 . There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2021. 56 -------------------------------------------------------------------------------- Table of Contents 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. AtDecember 31, 2020 , the Company had commitments to originate and purchase loans and unused lines of credit totaling$1.35 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. 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). AtDecember 31, 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 December 31, 2020 Company Bank Action Provisions Provisions Tier 1 leverage capital ratio 7.39 % 8.60 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 10.72 12.87 4.50 6.50 Tier 1 capital ratio 11.07 12.89 6.00 8.00 Total capital ratio 14.14 14.14 8.00 10.00 57
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The following table provides certain non-GAAP financial measures used to compute
certain of the ratios included in the table above, as well as a reconciliation
of such non-GAAP financial measures to the most directly comparable financial
measure in accordance with GAAP:
Standardized
Approach(1)
(Dollars in Thousands) December 31, 2020
Total stockholders' equity $ 813,210
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities 301,999
LESS: Certain other intangible assets 39,403
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
24,105
LESS: Net unrealized gains on available-for-sale securities 19,894
LESS: Noncontrolling interest 1,536
ADD: Adoption of Accounting Standards Update 2016-13 10,439
Common Equity Tier 1 Capital (1) 436,712
Long-term borrowings and other instruments qualifying as Tier 1 13,661
Tier 1 minority interest not included in common equity tier 1 capital
749
Total Tier 1 Capital 451,122
Allowance for loan and lease losses 51,070
Subordinated debentures (net of issuance costs) 73,850
Total Capital $ 576,042
(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) December 31, 2020
Total Stockholders' Equity $ 813,210
LESS: Goodwill 309,505
LESS: Intangible assets 39,660
Tangible common equity 464,045
LESS: AOCI 20,119Tangible common equity excluding AOCI $ 443,926
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, 2020 for a summary of our contractual obligations as ofSeptember 30, 2020 . There were no material changes outside the ordinary course of our business in contractual obligations fromSeptember 30, 2020 throughDecember 31, 2020 . 58
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Table of Contents OFF-BALANCE SHEET FINANCING ARRANGEMENTS For discussion of the Company's off-balance sheet financing arrangements atDecember 31, 2020 , see Note 15 to our Condensed 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.
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